SEO: It is a process of increasing the online visibility, organic (free) traffic or visitors to a website. It is all about optimizing your website to achieve higher rankings in the search result pages. It is a part of SEM, and it gives you only the organic traffic.

Two types:

On-Page SEO: It deals with the optimization of a website for maximum visibility in the search engines.
Off-Page SEO: It deals with gaining natural backlinks from other websites.

SEM: It stands for search engine marketing. It involves purchasing space on the search engine result page. It goes beyond SEO and involves various methods that can get you more traffic like PPC advertising. It is a part of your overall internet marketing strategy. The traffic generated through SEM is considered the most important as it is targeted.

SEM includes both SEO and paid search. It generally makes use of paid searches such as pay per click (PPC) listings and advertisements. Search ad networks generally follow pay-per-click (PPC) payment structure. It means you only pay when a visitor clicks on your advertisement.