Leading is a typography term that describes the distance between each line of text. It is pronounced ledding (like "sledding" without the "s"). The name comes from a time when typesetting was done by hand and pieces of lead were used to separate the lines.
Today, leading is often used synonymously with "line height" or "line spacing." Sometimes the terms have the same meaning, while in some applications, the implementation is different. Font leading is a setting commonly found in graphic design programs, while word processors typically use line spacing. Leading is typically measured in pixels, while line spacing is measured as a ratio of the default line height.
In manual typesetting, leading defined the distance between each line (the width of the lead). However, modern applications often calculate leading as the font size plus the space above a line of text. In Photoshop, for example, the default leading or "Auto" setting for a 40px font is roughly 50px (125% of 40px). The extra ten pixels provides decent padding between each row of text, which makes it more readable. If the default leading is too much or too little, it be modified using the Leading setting in Photoshop's Character palette.
Most text editors use a default line spacing of 120 to 130% of the font size. A line spacing setting or 1.2, for example, is common in many word processors. However, this can be adjusted to another setting, such as 1.5 or 2.0, to add extra spacing between the lines. If leading or line spacing is reduced below the default setting (such as a leading of 20px for a 40px font), the lines may overlap.
NOTE: Leading is generally calculated from the baseline of a font (the bottom of a lowercase "a") to the baseline of the row above it. However some programs add more vertical padding to each line than others. Therefore, different programs may produce different line heights with the same leading size.