Module position are placeholders used in a template to identify positions in the template and to tell the Joomla application where to place the output from the modules you assign to a particular position.
For example the module position "left" could be used in the left side of the template to display your navigation menu. That way you will know that when you assign a module to position "Left" the module will be displayed there.
Ultimately it is up to the designer of the template to use a module position and not all templates support all positions. When you assign a module to a position that does not exist in the template it will not be displayed. Common module positions are left, right, banner and top.