Voice Leading

The term "voice leading" comes from choral music, but it applies to
chord progressions in all sorts of arrangements for all sorts of
instruments. A chord progression has two dimensions: horizontal and
vertical. Let's say you are playing four-note chords in sequence. You can
think of the progression as a series of block chords (vertical), but you
can also think of it as four independent musical instruments (horizontal),
which play one note at a time, playing four different melodies which line
up to make the chords. So voice leading is the process of writing four
melodies which are smooth and logical and easy to sing or play, in the
service of creating the chord progression.
For example, if you were to compose a melody with a certain chord
progression, and arrange three singing voices beneath the melody to
flesh out the chords, you would usually not want the melodic lines of the
three singing voices to have to jump around across awkward wide
intervals from one note to the next. So you would try to follow the rules
of voice leading outlined in classical music theory, to produce smooth,
musical lines.
Here is a rough example I have created from a Bach chorale.
You might think of this piano part as a series of chords:

However, it is also four melodies sung simultaneously, using voice

leading:

Orchestral composers think about voice leading. Pianists who improvise

in jazz pay attention to voice leading, which you can think of as how to
play a chord progression with the least amount of changes in hand
position and the smoothest fingering patterns.
Unfortunately, due to the nature of the relationship of the pitches on the
six strings of the guitar, the concept of voice leading is very hard to
implement on guitar, and most guitarists don't get around to working with
the concept. Guitarists, in contrast to piano players, tend to think of
chords as certain block shapes that they memorize, and they give little
thought as to creating different inversions and voicings of chords that
would create a smoother voice leading in a chord progression.

Wheat gave a very good explanation of voice leading and I thought I'd
just add a bit about counterpoint.
Up until relatively recently (1600s/1700s) the concept of a chord wasn't
around - composers may have thrown a C-E-G out there but they didn't
refer to it as a 'C Major' chord. However there were certain rules
prescribed that told what was legal or illegal as far as voice movement
(including valid intervals that could be reached, allowable intervalic
jumps, where in the rhythm different intervals could be found, etc) that
naturally led to what we now call triads. An excellent book on
counterpoint is Fux's Gradus Ad Parnassum - it covers the rules of
counter point which I have found very useful to keep as general guide
lines in lots of composition and performance situations. Also it's old
enough that you can legally download a free PDF (I'm assuming - its a
few hundred years old but copyright laws being what they are...)
A great example in how voice leading may be applied is to take the
melody that you want to play, the bass line that you would like to play
(sometimes derived in real time, sometimes pre-arranged) and fill in the
voicings of the chords on the fly. The four basic types of contrapuntal
motion are oblique, contrary, similar and parallel motion. using contrary
and oblique motion help to set up the independence of voices from one
another.
What's really neat about voice leading is that if you follow the voices and
not the 'expected' chord patterns you can arrive at some very different
sounds than you would have otherwise produced.
A last word on voice leading - inversions win the day! The idea of a
chords consonance can be thought of not only in its harmonic context
but also in its inversional context - A first or second inversion I chord are
a little more dissonant than a root inversion I chord. Thus it is the
composers challenge to write his/her piece of music so that the voices
naturally reach the inversion that best fits the situation. If at the end of
the piece you want to naturally fall into a basic root inversion chord to
give a very settled feeling but you have to make some very large vocal
jumps to get there or have to move everything up in parallel motion etc,
you might want to re-evaluate some of the preceding bars that you have
down to see if there is another way to get there. In the end a piece of
music's feeling can be totally altered by good/bad voice leading.