Shaders are small programmes that alter pixels or vertices. Consequently, there are two major types of shader - pixel shaders and vertex shaders. These programmes add effects to basic geometry - so a water-styled shader can be added to a flat blue texture to make it look reflective, or a glass-styled shader can be added to a polygon to make it appear transparent. These shaders are the key to what makes the graphics in games today look so much better than the graphics in games from 3, 4 or 5 years ago.Read more at Bit-Tech if you want to know everything about shader models.
Guide to Shader Models

Bit-Tech takes a look at the history of graphics card shader models. Here's a short snip: