From your bootloader screen, toggling the volume buttons will offer functions like Start, Power Down, Restart Bootloader, and usually … Recovery. Pressing the Power button generally executes the displayed function.
The recovery partition is a rudimentary mini operating mode which allows loading updates, wiping the cache partition, and performing a factory reset to a phone that cannot boot properly (e.g. in an endless bootloop, never reaching an unlock screen). It's not called recovery for no reason -- it's an essential tool for restoring a broken phone.
Some phones are supported by third party recovery images, like ClockworkMod, with advance features including selective backup and restore, mounting partitions usually only accessible after the Android OS is running, and installing a root service.
Similar to Unix' superuser command, root allows the user to perform system-level actions. Rooting is a powerful tool that enables some features and access to the operating system while it is running.
Rooting suppresses built-in security protections of the operating system, and should only be done if you have full understanding of the risks. You should never grant an installed application root access, or permission to install a root service, without knowing exactly what it needs it for. 99.9% of apps will never need root access.
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