Web directories are essentially like a search engine, but instead of allowing you to search your website for keywords and so on, the Web directory authors will normally review your website and place it in the most appropriate category that relates to your website. This makes it easy to find other sites on the same topic as your own and also provides a way to bring people to your website who are looking for information on your subject matter.
One of the most common directories is called Dmoz. Dmoz is perhaps one of the oldest web directories on the web and has been running for around 12 years as of 2010. With over 4.5 million websites Dmoz continues to be one of the most used directories. Dmoz data also powers the Google directory. For webmasters getting your website added to the Dmoz directory is a sure way of getting good traffic and at the same time giving your website a rankings increase. Dmoz is also free which is a good thing for startup businesses and individuals.
Most directories work the same way - you select a category that is most suited to your website and then you fill out a form detailing your URL, Website Title and a short description. Some might ask you for a list of keywords that relate to your content aswell. Its a quick process, taking perhaps 5-10 minutes to create a submission. Take care to ensure your URL and descriptions are grammatically correct and do not contain pure "advertising" keywords as most directories wont accept your listing otherwise.
It is possible though, to spend some capital and get your website listed in other directories. The Yahoo directory is a great example of this. Its used to power many other directories and has a pretty strict inclusion process that ensure each entry is carefully reviewed and edited before being added to the directory. The downside is that there is a yearly inclusion fee. Many argue that due to the high quality nature of the sites in Yahoo that it is a better directory than Dmoz.
Once you have covered the real big directories you can then begin the process of finding smaller directories to start submitting your website to. There are literally thousands of directories out there many are general and many cover a specific niche category. Use a service such as Submit To Web to find quality free or paid directories that match your target audience and websites content. Start slowly and submit a few links to begin with.
Try to avoid automatic directory submission software. This kind of thing is available, but you will have to pay for it and they generally do not offer the same kind of attention to detail thats possible with manual submissions.
To summarize the above, directories are a great way to get your website found and if you can find means to get listed on the large directories this is a sure fire way to get your site a high rank and get it listed in the search engines. My advice for new websites is to gather a list of perhaps 10-25 directories and submit to these and wait until you receive feedback from the directory owners to confirm/deny your listing. You can then use this feedback to improve your directory listings when you continue your submission process.