The basic purpose of the Levels adjustment is to define the area were true black (the black point) and true white (the white point) show up in the image.
Below is a histogram from one of my shots. Notice that there is a large gap on both the right and left sides between the graph and the end walls. This shows that the blacks in the image are being displayed as a dark gray and the whites are displayed as a light gray.
When you drag the sliders over to meet the histogram you are defining the ends of the chart as the black and white points. You can (and many people prefer to) use the Gray Point, Black Point and White Point tools to chose these areas in the image and you will get a similar result. I tend to use the Levels sliders as below
Sometimes it can help an image to move the left hand slider a little past the end of the chart. This can make the image more contrast and add some pop. This is a case by case thing though as it can be a bit over the top on some images.