The cursor in the selected window shows the location where most editing commands take effect, which is called point2. Many Emacs commands move point to different places in the buffer; for example, you can place point by clicking mouse button 1 (normally the left button) at the desired location.
By default, the cursor in the selected window is drawn as a solid block and appears to be on a character, but you should think of point as between two characters; it is situated before the character under the cursor. For example, if your text looks like ‘frob’ with the cursor over the ‘b’, then point is between the ‘o’ and the ‘b’. If you insert the character ‘!’ at that position, the result is ‘fro!b’, with point between the ‘!’ and the ‘b’. Thus, the cursor remains over the ‘b’, as before.
If you are editing several files in Emacs, each in its own buffer, each buffer has its own value of point. A buffer that is not currently displayed remembers its value of point if you later display it again. Furthermore, if a buffer is displayed in multiple windows, each of those windows has its own value of point.
See Cursor Display, for options that control how Emacs displays the cursor.
The term “point” comes from the character ‘.’, which was the command in TECO (the language in which the original Emacs was written) for accessing the editing position.