A category is a sub-set of your participants. Categories are mostly defined by either age groups or performance levels.
You can have an number of categories in your competition, but as a rule of thumb it is wise to use one category for each result that you want to award prizes to.
If you need to separate certain participants within one category, you can also use tags. This can be useful, for example when a single junior is competing in the elite / senior category.
More about categories can be found in the Competition Structure Tutorial.