As Dil Bert said, ripping a DVD just means copying the data off the disc. In the case of commercial DVD-Video, most of the discs have protection mechanisms like CSS that prevent copying but specialised softwares exist that decrypt the discs. Legality of ripping discs varies from country to country.
Most of the DVDRips you find online are not just 1:1 rips but transcoded to different container formats like AVI, MP4, MKV using codecs like XviD, H264 for video and MP3, AAC, AC3 for audio. These files are shared through a variety of different ways like usenet, bittorrent, http filehosts, ftp etc.
It's about the same as watching a low-quality DVD on your computer, just a lot more trouble.
That's not entirely true. Quality of the rip depends on various factors like source material, codec used, encoding parameters etc and vary from group to group. Some rippers prioritize quality while others put importance on fast release times, file size etc. Scene have rules that ensure quality of the rips and failure to abide them gets releases 'nuked'. In some rare cases a skilled ripper can make his rips better than the source by using filters to correct 'errors' in the source transfer like colour, AR etc.
Most of the video players these days will load softsubs automatically if they are placed in the same folder as the video file and have the same name.
IMHO, VLC is trying to be jack of all trades but master of none. Quality was never its strong point. Its popular only because it is an easy recommendation for non tech savvy users as the codecs are built in.
Note: I don't condone piracy and info in this post is to give a better idea of the topic at hand. If any of this violates any forum policy, I'm sorry and the mods may delete/edit it.