A capo is a device used for shortening the strings, and hence raising the pitch, of a stringed instrument such as a guitar, mandolin or banjo.
A capo is a device that allows you to move the nut of your guitar around. Not exactly, but if you think of it in those terms you'll be able to get a lot out of one. Essentially a capo is a strip of hard material (usually rubber or plastic) which is clamped onto the neck of your guitar at a position of your choosing, effectively providing you with a full barre on whatever fret you place it. It is a floating nut, if you will.
You can find more about capos, including how to use one to transpose the key of a song (and make it easier to play), in the article http://www.guitarnoise.com/article.php?id=2The Underappreciated Art of Using a Capo.
Also check out some of Guitar Noise's song lessons where using a capo adds tremendously to the ease of playing the song.