All the information on your hard drive is digital. Digital simply means that in its smallest part, the information can be broken down to a bunch of ones and zeros. Although you may have all your files organized into various folders in the Finder, this organization really has little to do with how all those ones and zeros are physically laid out on your hard drive. Generally when a file is saved to your hard drive it will be saved all in one contiguous line of ones and zeros if possible. Fragmentation happens when it is not possible to place all those ones and zeros in a single line but rather have to separate it into two or more parts.
Fragmentation is a good thing.
Before we get too excited about the possible negative effects of fragmentation, it is helpful to understand that fragmentation is a part of the normal working of your Mac. Fragmentation allows you to save large files even if you don't have enough contiguous space on your hard drive and also allows you to add information to files already on your drive without having to move them to a spot where there is more room. How it happens. As mentioned above fragmentation is a part of the normal functioning of your hard drive. If you were to simply copy 10 files onto an empty hard drive each one would be placed directly after the last.