WesMiaw pretty much summarized it. MP3 and AAC are both lossy/compressed format. The higher the Kbps, the better the sound.
"Apple Lossless (also known as Apple Lossless Audio Codec, ALAC, or Apple Lossless Encoder, ALE) a type of audio compression created by Apple Inc.
Having Lossless in the name, obviously means Apple Lossless is a Lossless codec, unlike a lossy codec (such as mp3) where audio quality is lost forever in the name of smaller files, lossless stores the original CD track without loss, like zip for audio. Apple Lossless can compress CD quality audio file to roughly half its original size.
Apple Lossless files are stored in the MPEG 4 container and have a .m4a extension. The MPEG 4 container is also used for Advanced Audio Compression (AAC), a lossy compression (currently all tracks purchased from iTunes Music Store (iTMS) are AAC)"
Apple Lossless
For listening on an MP3 player /iPod, AAC or MP3 files are OK. CD quality or losseless format (like Apple lossless, Flac, etc) are better for listening on speakers with a good stereo system.
I have everything pretty much in ALAC (Apple Losseless) because I dont see a reason to have 2 sets for each song and because I dont see a reason to degrade my music, especially now that storage keeps getting cheaper and cheaper. I think AAC/MP3's eventually will become obsolete.