In drupal 6,taxonomy is handled by the taxonomy module. To understand simply what taxonomy is consider an example. Suppose you created a site where you blog about different categories of products available in the market. So you decided to create a node for each product. For categories however you can take the help of taxonomy. Every taxonomy terms require a vocabulary. You can call vocabulary to be a group of terms.
So for example you create a vocabulary called "books" where only terms related to books will be kept.Some examples of such terms may be 'fictions','adventure' etc.
To assign a vocabulary to a node, perform the following:
2) Click on 'add vocabulary'
3) give a vocabulary name, give an optional description, an optional helptext. In the content types, you need to assign in which content types you want this particular vocabulary terms to show (suppose 'products' here). In the settings section, if you check the tags checkbox, then you will get a autocomplete checkbox for terms while adding node of content type 'products', if you add new terms in the box, then they will be automatically added to this vocabulary. If you check the "multiple select" box then you will get a multiselect listing the terms already present in this vocabulary, while adding the node and you cannot add new terms. The required field as the name suggest if checked makes the adding of terms to node as mandatory. You can give an optional weight if you assign multiple vocabularies to a particular node to prioritize.
4) Hit save.
If you now go and add a particular node of content type 'products' you will see the terms listed. you can select a few terms or add new ones. The new terms will be added automatically to the vocabulary you just created.