Sub-domain Examples:
blog.domain.com
dev.domain.com
test.domain.com
store.domain.com
Each subdomain is considered a separate websiteSub-directory Examples:
domain.com/blog
domain.com/dev
domain.com/test
domain.com/store
Subdirectories, also referred to as Folders, are any extension of the main domain. There are Pros and Cons to using each setup, so SEARCH the web for more info. For example articles like: http://www.ameravant.com/article/3398-subdomains-and-seo-pros-and-cons-of-subdomains-vs-subdirectories (If you need to know what setup is best, do research, do not base your conclusion of one website article)Google is your best friend, it not, it should be.