The clarity of a diamond is a grade of the amount of inclusions within the diamond and also the types. In general terms, the better the clarity grade the less chance of you being able to see any inclusions with the naked eye.
All diamonds exhibit some inclusions, formed during their creation billions of years ago, these can range from mineral deposits creating crystals trapped in the diamond, to wisps when the diamond has grown against its grain and many different methods in between.
Clarity is graded on a descending scale from: IF (Internally Flawless), VVS1/VVS2 (very very small inclusions), VS1/VS2 (very small inclusions), SI1/SI2 (small inclusions) and finally PK1-3 (also know as I1-3, and a very heavily included stones).
Most stones that are SI1 or above will not exhibit inclusions visible to the naked eye (but there are some that do) and nearly all stones graded to be PK1-3 will have inclusions visible from the naked eye.
The clarity rating is achieved by assessing the diamond under a loupe (10x magnification), which has led to some grading labs, such as HRD, to reclassify IF as ‘Loupe Clean’ or ‘LC.’
Below are two videos which explain the types of inclusions and their impact on the diamond, as well as giving clear visual examples.