When you buy a phone on contract with a carrier, they install software so that the phone can only be used with that original carrier. These phones are “locked”. An unlocked phone is one that never had this software installed in the first place or has had this software uninstalled sometime after purchase.
An unlocked phone has all the same great features as other phones, but allows you to switch between wireless carriers. A locked phone can only be used with the carrier it is locked to. An unlocked phone can be used with any GSM wireless network. Learn more about GSM networks here.