Magic Formats
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There are many different ways to play Magic the Gathering; these methods of play are called formats. There are two broad categories of formats, constructed and limited. In constructed, players build decks before the game from cards in their collections. In limited, players build decks from a limited (hence the name) pool of cards, for example a draft or from sealed packs.
Sanctioned Formats
These formats are sanctioned by Wizards of the Coast.
Constructed
Standard
Standard uses cards from the most recent sets.
Modern
Modern uses cards from 8th edition onward.
Legacy
Legacy uses all magic cards (except for those that are banned).
Vintage
Vintage is the same as legacy, only with a smaller ban list.
Commander
Uses 100 cards decks, with only one of each card being allowed. One card is designated the commander; it is kept separate from the rest of the deck and may be cast at any time.
Limited
Unsanctioned Formats
Constructed
Frontier
A new format that has created a lot of buzz in the community. Uses cards from the M15 set forward.
Kitchen Table
Fun games played between friends. All cards are allowed (unless the players decide otherwise), and players are expected to build decks of comparable power level to the other players, lest they become that guy.
Limited
Comparison (AKA Which Format is the Best/Should I Play?)
A note about pricing: Legal decks for every format can be built for about $10. Just don't expect them to be capable of ever winning a game or even remotely fun to play. Plan on spending at least $20 if you want to have fun.
A note about competitiveness: Top-tier tournament worthy decks tend to be expensive. This doesn't mean that cheap(er) decks can't win kitchen table, FNM or even take a small tournament by pure chance; but they will not hold up at the pro level. When deciding on how much you feel comfortable spending, keep your intended play environment in mind. If you aren't going to attend a grand prix, you don't need a $1000 grand prix winning deck.
Standard
+ Well supported (Wizards caters heavily to Standard and releases new sets constantly. R&D actually play-tests Standard. They also hold numerous tournaments for the format.)
+ Cheap(er) then other formats in the short term.
+/- Slower game.
+/- Smaller card pool.
+/- The current meta-game and card-pool favor decks that run expensive mythics.
- Less cheap in the long term (as sets rotate out, you will need to buy new cards to fill the holes in your deck).
Tournament Deck: White-Blue Flash - $394
Budget Deck: ElectroStatic Pummeler - $84
Modern
+ Many different decks and strategies are viable.
+/- Fairly fast game.
+/- Large cardpool.
+/- The cards you use never rotate out (but the cards that you hate playing against don't rotate out either).
- Sort of receives support from Wizards, but not nearly as much as Standard.
Tournament Deck: Tron - $569
Budget Deck: 8 Whack - $108
Legacy
+ Many different decks and strategies are viable.
+/- Fast game.
+/- Larger cardpool.
+/- The cards you use never rotate out (but the cards that you hate playing against don't rotate out either).
- Receives almost no support from Wizards.
Tournament Deck: Miracles - $2631
Vintage
+/- Extremely fast game.
+/- Largest cardpool.
+/- The cards you use never rotate out (but the cards that you hate playing against don't rotate out either).
- Receives almost no support from Wizards.
Tournament Deck: Jeskai Control - $17,534