The term "lag" has several meanings, all of which mean something like "unwanted delay/break".
Lag is a condition where your ping is higher than those around you. The higher your ping is, the longer it takes for your computer to receive and send information. When you have a very high ping, it will cause problems for both you and your opponents. When you see an enemy, you will be seeing their old location. When you shoot/claw at them, they'll really be a bit away from you. Your enemy will see a figure frozen in place, and you will unfreeze and move to a different spot at random intervals, making it hard to catch you.
It is generally accepted that having a ping of about 100 or less is optimal. You may sort servers by their ping, to see which one is closest to you, and will thus give you the lowest ping. You could also check if you have some kind of file sharing software or download running because that can have severe influence on your ping time.
Some servers run a modification called Unlagged. This helps compensate for lag and helps to predict where lagging players would be based on their current motion and speed. Unlagged has it's own set of problems and is not endorsed by many players as being a good solution to lag.
Sometimes, the gameplay is smooth most of the time, but suddenly you might experience a lag. This is called a "lag spike" and can be caused by all sorts of reasons, for example by some Internet problem that is out of your realm of influence. Or your graphics card might be busy swapping data with the computer memory because the map is so texture heavy. Or your computer might be exchanging lots of information with the server all of a sudden because you entered a room with many buildings that your client software didn't have to know about until that moment.