A license is the agreement that a photographer or agency provides and that the image buyer or user agrees to when they buy or download an image for use - even if the image is free you are usually bound by some kind of license agreement
There are several types of license available ranging from very restrictive in the case of rights managed images to quite relaxed in the case of creative commons. Most images are licensed as royalty free images because that allows some flexibility and hence are popular with buyers.
In a rights managed license the buyer needs to define exactly where the image will be used, this includes the number of copies printed or length of time the image will be in use, size of image and industry it will be used in. Because every image use is accounted for this allows for the buyer to exclusively license the image for use in their industry hence meaning that a competitor will not be able to license the same image (this sometimes becomes a problem with royalty free where anyone can download and use and image) RM licenses are very restrictive and you need to re-license the image to use it again in a different medium. They are usually the most expensive option too, although prices can be cheaper when comparing certain usages with full priced royalty free). Look to Rights managed agencies for specialist images and those with very high production values (i.e. hard to setup)
Images which feature logos, brands, recognisable products, events or celebrities are licensed as editorial use meaning they can only be used as part of newsworthy stories. Editorial images cannot be used in any form of advertising or commercial application.
Royalty free has become the default license type of selling stock images. It allows flexibility to the designer in that an image only needs to be purchased once for use in unlimited applications. There are however some license limitations, you can usually print up to 1/2 million copies of the image in a publication but you cannot create a derivative products using the image (one where the image forms a part of the products reason for existence e.g. a poster, calendar or t-shirt) for that you need an extended license. All microstock images are licensed as royalty free, there are also a lot of full priced or macrostock agencies
An extended license extends the terms of a standard royalty free license so that an image can be used in derivative products (e.g. mugs, t-shits, website templates) there are usually limits on the number of products that can be produced/sold. It sometimes works out cheaper to license an RM image for such usage, but microstock agencies generally offer a cheaper option for low volume use.
Creative commons licenses are a series of license types that were setup by a non profit organization to help photographers easily license their work. Creative commons licenses allow photographers to protect their work in simple to understand terms while still providing it for use free of charge to image users. Creative commons license always require an attribution (a credit to the image creator) and in a lot of cases require that derivative work be ‘shared alike’, images are often not available for commercial use. More about creative commons licenses. Also see CC Zero, a license type that dedicated images to the public domain.
This is usually an absence of a license agreement, the image creator has placed their work into the ‘public domain’ for use by anyone in whatever way they like.