Magento has three different code pools:

Community : app/code/community/

Core : app/code/core/

Local :app/code/local/

Core pool

All existing feature of Magento code exists in this folder. The best practice that Magento team suggest not to change any code in core files only Magento Team can make changes in that in New Releases. So that it will not create a problem in time of Magento Upgradation from old version to the new one.

Community pool

In this folder, we will have all the 3rd party extension. Basically, all extensions that we install from Magento Connect that will be found in app/code/community/

Local pool

This code pools also for community developers as well as store owners who want to make their work on their own. If you want to enhance any core functionality or make any changes in core files you can change it in this code pools at the time of up-gradation your change not be overwritten or removed.

 app/code/local/

 In any Magento Extension, we need to define code pools, so that Magento can understand where to find files for that extension.