This week's book giveaway is in the OCPJP forum. We're giving away four copies of OCA/OCP Java SE 7 Programmer I & II Study Guide and have Kathy Sierra & Bert Bates on-line! See this thread for details.
You're creating an instance of the class ArrayList, and you're holding it in a variable of type "Collection". This is like buying a pet of type "Goldfish" and putting it in a fish tank. You can't buy a "Fish" -- you can only buy an Angelfish, a Goldfish, a Guppy, etc. But the tank can hold any kind of Fish.
A Collection variable can hold any kind of Collection -- and ArrayList, which implements List which extends Collection, is a kind of Collection.