Categorizing your product can help your customer browse your shop easier and help you manage your products.
It may not be that important if you only have 1 or 2 products to sell. But it is a good habit that will definitely help you when your shop expands eventually.
There are two different categories: parent and sub.
The sub categories are basically just the categories who are within another category. This latter category is in turn called the parent category.
Another way to think of it is that imagine yourself walking into a big multi-level department store. Each level sells different things: toys/accessories, woman's clothes, man's clothes, etc. Then, on each floor, you can also find different parts of the floor selling different things: bags, shirts, pants, ties, etc. The floors, in this case can be thought of as parent category while the different parts of the floor as the sub categories. =D