Clarity refers to the cleanness or purity of the diamond. The clarity rating depends on number, size, nature, and location of the internal (inclusions) and external (blemishes) imperfections. Less imperfection gives a better rating.
Clarity Grade are listed as FL (Flawless) all the way down to I4 (Inclusions).
The following chart shows the grading system with examples for each.

Diamond Clarity Chart
FL - Flawless   Shows no inclusions or blemishes of any sort under 10X magnification when observed by an experienced grader.   IF - Internally Flawless   Has no inclusions when examined by an experienced grader using 10X magnification, but will have some minor blemishes.
VVS-1 and VVS-2 - Very, Very Slightly Included   Contains minute inclusions that are difficult even for experienced graders to under 10X magnification.
VS-1 & VS-2 - Very Slightly Included   Contains minute inclusions such as small crystals, clouds or feathers when observed with effort under 10X magnification.
SI-1 and SI-2 - Slightly Included   Contains inclusions (clouds, included crystals, knots, cavities and feathers) that are noticeable to an experienced grader under 10X magnification.
I-1, I-2, I-3 and I-4 - Included   Contains inclusions (possible large feathers or large included crystals) that are obvious without magnification and may affect transparency and brilliance.

Be aware though that there are methods of enhancing a diamonds appearance. These are laser drilling and fracture filling.  Diamantbids.com does not sell laser drilled or fracture filled diamonds. We have included it in our Diamond Class for reference and to teach you how to spot these enhancements.  Reputable jeweler will disclose if a diamond they are selling has been enhanced, but there are many dishonest jewelers out there and with this little bit of knowledge, you will learn how to spot them.
Laser Drilling
Laser drilling is a process where a hole is drilled into the diamond, usually through the side, and carbon spots are removed. This is a permanent enhancement that will not be affected by cleaning or heat from setting repairs. Laser drilling can be spotted by looking for tiny lines that look like jet trails within the diamond. A newer type of laser drilling which is harder to detect creates cracks around inclusions near a diamond's surface. These imperfections are then removed leaving marks that look like natural flaws.
Fracture Filling
Fracture filling involves having cracks within the diamond filled with a clear substance.  The cracks will not totally disappear, but they will be less noticeable. This is a not a permanent enhancement and will degrade with heat, cleaning and sunlight over time. A telltale sign that a diamond has been fracture filled is by looking at it through a 10x loupe. You will see areas of color that follow the contours of the fracture. Another sign is a group of bubbles trapped within the diamond.  These bubbles may make the diamond look cloudy.