Some yarn comes in a skein and is ready to use. Some comes in a hank and needs to be wound before it’s ready for knitting (otherwise it will tie itself in knots.) You can wind the yarn by hand into a ball; into a cake using a handheld yarn winding stick; or into a (often very tidy) cake using a yarn winding machine, perhaps with the assistance of a swift. Examples are each are shown below, and the video gives a demonstration of how to do each.
The one reason to create cakes instead of balls is that the yarn pulls from the center of the cake and it will stay relatively stable. A ball will roll around in your bag as you use the yarn and can get tangled, especially if you have multiple colors in your project.
Want to learn to wind hanks of yarn? Check out the video below.