Compositing referers to the process of combining two different clips together. Almost all special effects are heavily reliant on good compositing skills. Traditionally, it has been used to describe mixing digital and real footage together. There is a wide variety of composting software that allows you to chroma key live action or place alpha-channeled digital files in live footage.
Chroma key is the technology wheree a live actor is filmed in front of a blue or green screen, and then the blue or green screen is dropped out to be replaced by whatever back the compositor wishes. There are quite a few blue and green screens on the market, but you can build your own low budget version by hanging a blue or green sheet and filming in front of that.
Another inexpensive solution is to purchase linoleum that can be hung from a ceiling, dropped to the floor, and extended out along the floor. This provides a smooth transition from back wall to floor that, after being painted with a chroma key blue or green, works well as a small blue screen. Remember to keep the blue screen on the floor clean, as any dusty footprints make for very difficult chroma keying.
Another form of compositing is to place digital characters into real footage. To do this, animation clips must be submitted with an alpha channel. Alpha channels are black-and-white channels that define which parts of an image are to be seen and which are to be dropped out. Alpha channels can be embedded within the clip or rendered as a separate clip. The key is to make sure your 3D application knows you wish to create an alpha channel, as trying to knock out a black background from a clip without an alpha channel is next to impossible.
There are as many compositing software packages as there are 3D packages. The selection is quite varied and increases annually. Adobe's AfterEffects is probably the most popular consumer-level compositing package. However, Adobe's Premiere and Apple's Final Cut Pro are also good choices for compositing. Owning one of these software packages is a good idea, even if you do not plan to use real footage with digital files.
Compositing can also be used to composite several digital files together. Different 3D packages do different functions better than others. Often times, the best 3D projects are created in a variety of packages, and then the results are composited together into one animation.