A "word" is what in other languages would be called a "function" or "procedure". "word"s are the lowest level of execution in Forth -- essentially, they are Forth.
The "dictionary" is where "words" are "looked up". When you have a Forth prompt open, and type a bit of text, Forth will break off one word (in the normal sense) and see if it can find it in the "dictionary". If it is found, then the "xt" (eXecution Token) of that "word" is either executed directly, or compiled into the current word (depending on the context).
If the word is not found in the "dictionary", an attempt to interpret it as a number is made. If that does not succeed, then the Forth will complain about not understanding what the word entered means.