Before we create magento custom module, let’s have a look on code directory structure of magento where we create custom module. Here is only code folder structure.

- app (contains code pools, design, configuration, localization and Mage.php files)

        - code (contains the code files)

                         - community (third party modules)

                         - core (magento core modules)

                         - local (local modules)

local folder contain namespace folder-> module folder(custom module)

components of Module :

(these all components are folder/directory under Module folder):
Blocks:  contain functions that are used to display data in templates.
Models: define business logic of modules.
Controllers: Defines page layout and blocks files Which are loaded when a URL is Hit by user.
etc:  contains configuration files which tells magento how the module interacts.
Helpers: contain functions like image resize & validation etc which can be used anywhere in our application
sql:  contains SQL scripts to create, modify, or delete SQL tables.

How to create custom module in magento ?

step 1:
Go to app/code/local/ & create folder pankaj/Mymodule/etc,

in etc folder, create a config.xml file with the following code.

<?xml version="1.0"?>
<config>
    <modules>
        <Pankaj_Mymodule>
            <version>0.1.0</version>
        </Pankaj_Mymodule>
    </modules>
    <frontend>  //tell Magento about the controller dispatched.
        <routers> //tells Magento how to access our controllers
            <mymodule>// tells magento how to access our module in frontend
                <use>standard</use>
                <args>
                    <module>Pankaj_Mymodule</module>
                    <frontName>mymodule</frontName>
                </args>
            </mymodule>
        </routers>
    </frontend>
</config>

step 2:
Go to  app/code/local/pankaj/Mymodule & create controllers folder.
in controllers folder, ctreat IndexController.php with following code

<?php
class Pankaj_Mymodule_IndexController extends Mage_Core_Controller_Front_Action
{
    public function indexAction()
    {
        echo "Hello there";
    }
}

?>

Next step is activate our module by creating config file Pankaj_Mymodule.xml in the app/etc/modules directory.

<?xml version="1.0"?>
<config>
    <modules>
        <Pankaj_Mymodule>
        <active>true</active>
        <codePool>local</codePool>
        </Pankaj_Mymodule>
    </modules>
</config>

This xml in etc tells magento that module is active and will be available in local codePool.

how to Check: Is the module enabled?
you can see your module in Magento Admin Panel.

Go to System->Configuration->Advanced->Disable Modules Output.
& You will come to know that Pankaj_Mymodule is there in the list of modules.

Now open URL: if you are using localhost, then url is:  localhost/projectname/index.php/mymodule/index, it will print "Hello there".