The Chat feature (information valid for older releases) is designed to allow users to enter "chat rooms" and hold real time conversations (via instant message) with other users who are logged in to the same room. Chat is not a heavily used or heavily developed feature, it is simple but it works. The feature requires extra server power, and may not be suitable for budget hosting arrangements.
Chat allows for multiple "rooms", and multiple users per room.
The general method for using chat is to select a room, enter the room, and send messages by typing them in a text box. All recent messages for the room are displayed and updated periodically (period set by chat administration).
Review of 1.9.4 Chat Operation
See the current developers notes on this feature. Chat