Most commonly used as the phrase "laugh out loud" in IM conversations. A less common use however is the phrase "lots of love" which is used at the end of conversations.
CoolGuy47: I think i am gonna go to bed now.
SeXyChik99: ok. Bye. lol <3
(in this case it would be lots of love)
A short way to express laughter in typing, rather than type "ha ha" which might be mistaken to somebody as a more offensive laugh. A more convenient way to express laughter than "I'm laughing hard." If it is said in person, this could mean the speaker is incredably lame, stupid, or ignorant, or is addicted to games.
John: So my friend got tripped today.
Jim: Ha ha!
John: Hey, shut up, he wasn't expecting it!
Jim: Err.. what I meant to say was: lol that sucks
John: Oh, okay.
1: LOL could be an abbreviation for "Laugh(ing) Out Loud"
People will say it on websites such as YouTube, Facebook, Twitter, a lot of people say lol in texting, too. So it is a reaction to seeing something funny.
2: It could mean Lots Of Love for people that aren't familiar with it.
3: League Of Legends
1: Guy 1: Hey dude, look at this cat video
Guy 2: LOL
2: Person 1: I just got a Gecko Person 2: Cool. They are very social animals. Be sure to give them LOL.