sed is short for stream editor. It reads in a file (one line at a time), modifies the contents per your parameters, and then outputs.

A more simple description, it allows you to modify the contents of a file without you actually having to open it.

Here a simple example of replacing the word original with new in a file called notes.txt.

sed -i 's/original/new/' notes.txt

I use the -i to not have sed automatically create a backup file.

References

Simple introduction - http://www.grymoire.com/Unix/Sed.html
Another introduction - http://lowfatlinux.com/linux-sed.html

Using sed to edit and save to the same file - http://unstableme.blogspot.ca/2010/01/sed-save-changes-to-same-file.html