If you look through Godaddy's FAQ you can find out all you need there, be sure to search for sub-domain with the hyphen.
If they're hosting a domain for you, where you actually have Web space, then you can create a subdirectory to put a portion of your website content in and create a subdomain in their "manage domains" interface that maps to that subdirectory.
You can also use their DNS interface to create a subdomain that doesn't go to any part of your existing domain, you can point it to another domain or IP completely. It looks to me that you can "mask" this, but I haven't done it so I'm not sure. You'll have to go through it and find out.
Subdomains are a free service with each domain they register.
If you have some SEO end in view here, you should continue searching here for how search engines handle subdomains, and also having domains hosted on unique IPs.
And be aware that as far as I can tell, any parked domains pointed by Godaddy's DNS management will resolve in a reverse-IP lookup to a Godaddy IP shared with over a million other domains.