Help:Categories
Categories are broad categorizations a character or article can fit into. Unlike "Tags," very specific keywords that may be associated with an article, categories are the sort of broad "buckets" into which you could sort an article, depending the standard of comparison you were using.
Category markup
Categories are created by placing a special non-rendering link in an article, example:
[[Category: Autobots]]
...places the article in the category "Autobots." A link to this category will appear at the bottom of the article.
By convention, category links are placed at the bottom of an article, and sorted into alphabetical order so they can be easily found and edited. (The Grimlock (G1) article currently(Jul-30-08) has 24 categories, so organization is important.)
Technical notes
Category order
Categories are listed at the bottom of article in the order which they appear in the article. This means that if a template such as {{picsneeded}} (which includes a category) is used, Category:Articles in need of images will be listed first.
While this can screw up the alphabetical order of the category list, on-balance it is considered a good thing, since it communicates that this category 'comes from' higher up in the article (such as tracking down a spoiler template in a long article.)
Except those which are included as part of a template, categories should always be placed at the bottom of an article.
Overriding default sorting
Sunstreaker is listed under 'S,' on his category page- a perfectly rational arrangement. However- Simon Furman would also be listed under S, which bad.
You can override the sort-order of an article within a category by adding a pipe (|) character, followed by the way you'd prefer it to list!
[[Category: Category:Writers|Furman, Simon]]
The article "Simon Furman" is now listed under the F's!
Another seldom-seem application of this trick comes up with the Dreamwave Armada comic, which neglected to give titles to its stories, whose articles are therefore Dreamwave Armada issue 1, Dreamwave Armada issue 2, etc. In order to prevent these article from listing 1, 10, 11, 12, 13, 2... they have a sort-order declared.
[[Category:Dreamwave Armada issues|01]]
Adding these suffixes can be a pain, especially if there are a lot of categories, so you can use the magic word "Defaulsort," which will override the sorting for all categories in the article that lack a suffix.
{{DEFAULTSORT:Furman, Simon}}
Linking to categories
To create an in-article link to a category instead of placing the article in that category, add a colon (:) at the beginning of the link.
[[:Category: Autobots]]
New categories
Not-previously-existing categories can be created simply by linking to them. Such links will be red (indicating the category does not exist,) but the link will still show a list of all articles that have this category. To make the link blue rather than red, you must create an article for that category. Some articles are simply a blank page- those whose use or meaning is obvious. Other times a short statement clarifying the purpose, reasoning or usage of that category is appropriate.
When creating a new category, it is generally better to create a link to the category and leave it red, then begin a discussion on an article's talk page, proposing that category before you create an article for it to poll other users reactions. Red-link categories are generally considered 'less official' than those with articles, and a 'probationary period' of several days or weeks allows other users a fair chance to notice the link and voice objections to the category if they have any.
This is to prevent category overlap, or the proliferation of frivolous categories. For example, after considerable debate a consensus was reached that combiner team members such as the Combaticons did not require a Category: Combaticons for themselves.
Categories within categories
New Categories should, themselves, be placed within other categories. (Except for a handful of Top-level categories.) A parent category should be the 'finest' or smallest category for which is it true and accurate to sort all members into that category. For example; while it may at first be tempting to put The category "Junkions" within the category "Autobots," there has been a single Junkion who was also Decepticon, so the category Junkion would instead have to go under "Factions," just like Autobots.
As with anything, when in doubt try to find a similar article or category and follow the example it sets, and you shall not go far wrong!