When you purchase a dedicated hosting plan you rent an entire server from a hosting company. The hosting company retains ownership of the server and ensures that it is operational at all times.
Colocation hosting, sometimes abbreviated to colo hosting, is a little different. With colation hosting plans you need to provide the server itself. The hosting company will host your servers for you and maintain them, but you retain full ownership of the hardware.
Many companies find colocation hosting a practical solution when they need more scalability and security that can be provided in-house.