Event & observer is one of the most powerful features which we can use in any custom module. Generally, Magento uses a different kind of events which are fired/dispatched by Magento throughout its code base. Each event has class objects (data array) attached as function parameters & the observer class receive this class object when the certain event is fired. In a simple way, Observer is act like a listener which is used to detect the event. Observer always waits for an event so that it can execute the event whenever the event is fired.

Magneto uses Mage::dispatchEvent function to fire an event, you can find this inside the core files ofMagentoo.

For Example

Mage::dispatchEvent('checkout_type_onepage_save_order_after', array('order'=>$order, 'quote'=>$this->getQuote()));

Each event has a name and data, First Parameter refer to Event Name "checkout_type_onepage_save_order_after" and 2nd parameter refer to data i.e array(‘order’=>$order, ‘quote’=>$this->getQuote())

1. We need to Define observer for 'checkout_type_onepage_save_order_after' event in config.xml file

<events>
     <checkout_type_onepage_save_order_after>
         <observers>
                   <save_after>
                    <type>singleton</type>
                    <class>Namespace_Modulename_Model_Observer</class>
                    <method>saveOrderAfter</method>
                  </save_after>
        </observers>
      </checkout_type_onepage_save_order_after>    
</events>

2. Now, Create Observer.php file to execute the event observer is located in the Model directory of your module and extends the Varien_Event_Observer class
Path: /app/code/local/Namespace/Modulename/Model/ folder and create a file Observer.php:

class Namespace_Modulename_Model_Observer extends Varien_Event_Observer
{

   public function saveOrderAfter($observer)
   {
         $order = $observer->getOrder();
            $quote = $observer->getQuote();
   }
}