Updating and upgrading are two very different changes to your MacOS that allow you to use the most recent software features, bug fixes, and get the most out of your Mac and the various apps you use day-to-day.
An update allows your Mac to stay up to date with recent changes and bug fixes that only enhance and improve the current version of MacOS that you are running on your Mac. An update is more incremental, meaning your MacOS might update from Big Sur 11.1 to Big Sur 11.2 or Monterey 12.1 to Monterey 12.4.
In other words, the version of software you are running isn't changed, but improved and, very simply, updated.
An upgrade is far more complicated than the standard MacOS update. It also comes with risks that often scare Mac users, such as data loss or upgrade errors that take up time and energy. However, upgrades are generally low-stake since every software is bound to have bugs or issues that are usually fixes by the updates Apple releases.
Unlike an update, upgrades are larger improvements to your MacOS that allow you to utilize innovative features and apps. Often this means that you will be using your Mac differently, be it that the Maps app has additional features or the look and feel of the MacOS has been largely altered. Having the most recent version of MacOS is often required to do the many day-to-day activities you want to do, or download the most recent compatible apps you want to download.
Upgrades are also not incremental, they are large downloads and include those big changes mentioned above, meaning you might go from Big Sur to Monterey.
When you upgrade, always remember to make sure your data is backed up or stored elsewhere so that you don't lose any data. While this isn't a common occurrence, it's always good to take preventative steps to data loss.