It’s the scoreboard of reddit–a reward earned for posting popular content. It also comes in two flavors: link karma, and comment karma.
You gain karma points when your links and comments are upvoted.
You lose it when your links and comments are downvoted to a number lower than zero.
All of these votes a calculated, and the cumulative is known as your “karma score”, or just “karma”.
You can view a user’s karma at the top of the sidebar in their profile page.
So what the hell is karma good for?
While some reddit users dismiss karma, cheekily referring to it as “imaginary internet points”… I think it’s a useful tool.
It’s the best metric regular users have available to them to determine, at a glance, if someone is a valued member of the site.
If someone has lots of karma–either link or comment–that means that user has contributed popular content to the site. Note that it might not be “good” content, but it was nonetheless upvoted.
You have to meet a minimum karma score to post on certain subreddits– such as /r/videos, which required 10 link and comment karma. This was done in an effort to combat spam from newly created accounts.
You also have to meet a minimum karma score before being allowed to join a few private subreddits– such as /r/centuryclub.
In a nutshell…
Karma has no value outside of reddit, and its value inside is nebulous at best, but it does have its occasional uses.