Lists are a great way to help you organise the people you are following on Twitter into groups. This might be defined by people, interests, topics. For example I follow a variety of different Twitter users that are ‘news’ such as as the BBC and the Guardian. By curating a list containing these users into one group I can view ‘news’ tweets in one stream. I also have a list of the people I work with that tweet, another for people who share information about the use of technology and social media. 
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Update!

You previously were only able to create up to 20 lists of your own but follow as many lists that others create as you wish to.

Update to Twitter lists: You can now make up to 1,000 lists (up from 20), and each list can include up to 5,000 accounts (up from 500).

— Twitter for News (@TwitterForNews) May 30, 2013

How to create a list 

To bring up the list page you need to go to the drop-down menu in the navigation bar at the top of your profile page.

Here you need to click on lists. This will then pop up the Create list dialogue box.

Enter a name you wish to give your list. (Note: you have up to 25 characters and it cannot begin with a numerical character)

You have the option to give your list a description. Then choose whether you wish your list to be private (only accessible to you) or public (accessible to others who may then follow your list.) Remember to then Save list.

How to add or remove people from lists

To do this you need to go to the user’s profile. (Click on the user’s name of the tweet you see in your stream or find it using the search box). On the profile you will see a drop-down menu. Simply click on add or remove from lists. You don’t need to be following the user.