Keyword Density is the percent of your site that key words take up.
Every site has a range of words on their site. This can vary from 50 words to thousands. A Keyword Density is the percent of those words that are Keywords.
It is important for sites to not overload their site with too many as it can come across as spamming. This can not only cause confusion when it comes to the people who view your site. It also can give a bad impression to the search engine resulting in you ranking lower in listings.
If we look at this post and my key word being Keyword Destiny. I have 134 words on this page and used the key word 4 times that would mean 4/134 X100 so I would have a Keyword density of 2.98%.