Unlike tags, which are not in a hierarchy and can be created by anyone, categories must be managed by an administrator.
An example of categories, would be to have Regions as a top level category, then sub-categories of Africa, Asia, Europe, Latin America, North America, and Oceania, then further sub-categories of each of their countries.
Categories can only be associated with library items and folders. Content needs to be enabled for categorizing before you can add it to a category.