Create a new disk image

If you're new to this kind of stuff, just click on "Deploy a Linux distribution", select something easy like Ubuntu, and enter your password. That'll prepare the OS for you. Then you can log in to your server by SSH, and install whatever you want. There are plenty of tutorials on the Internet on how to setup a webserver (or whatever else you need). After that, you can upload your websites and stuff.

"Create new disk image", on the other hand, is for those who want custom partitioning schemes. For example, I have an additional disk image where I keep all my data separate from the OS itself, so that if I ever screw up the OS partition, I can start from scratch without having to worry about my data.

Your Linode is like a brand new computer. You have to install a bunch of software in order to use it. When you sign up with some of the more expensive companies, the company has already taken care of the software, so all you need to do is upload your stuff and you're done. But here, you have to do everything by yourself. That's why prices are so low here.