Iteration: One iteration is a few set of days under which team will try to achieve predetermined set of goals. One iteration can be anywhere between 1 week to 4 weeks. A standard meaningful iteration will be of 2 weeks . Depending upon your overhead you can stretch or suppress the iteration.
Velocity: Velocity is a quantitative unit which is calculated in person work hour and reflect the amount of work team has either done or planned to do in one iteration.
Assuming the estimates are done by Planning Poker or any other estimation methodology when you sum up all the numbers of units for all stories you have included to finish in the current iteration you will get Estimated Velocity.
When you add up all the available man hours for the team members participating in that iteration you will get Available Velocity.
When you add up all the estimated units of work in the stories considered done (100% done and not 99% or less) you will get Actual Velocity. Now thats strange why we cannot considered the estimates of the stories which are almost done and the answer is very simple, you will not deliver a story to the client unless it is 100% done and not when it is almost done. So what you cannot deliver to the client it is not considered done.
This post will continue with further details...
