Containers are Files that can contain audio and/or video. The audio and video is encoded (compressed) using codecs, and then stored in a container. Codecs can normally be used in a variety of different containers.
You can usually tell what container format is used for a file by looking at the file's extension. For example, if a file has a .mp4 extension, it is likely to contain MPEG-4 video.
Below are listed the formats you can play with vlc (if I've missed any, feel free to add it :-)
|.mkv, .mka, .mks||Matroska|
|.mpg, .mpeg||MPEG-TS or MPEG-PS|
|.m4a, .m4b, .m4p||MPEG-4 Audio|
|.rm, .ram, .ra||RealMedia|
|SDP (streaming only)|