It's when someone works at a company for free or a very low stipend, to get experience in that industry. It's usually done by a student or someone just out of college and lasts for a finite amount of time (like 4-6 months). Doing an internship can help you get a job at that company (or a different one) because it puts experience on your resume that you wouldn't have had otherwise.
Do you ever watch Friends? They had an episode in one of their last seasons where Chandler takes an internship at an advertising agency. The joke is that all the other interns are like 10 years younger than he is.
-emily
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