"Vendor Trash" - This term has come to refer to items that should be sold to the merchants. This is because they won't, or are extremely unlikely to be bought by other players. Perhaps they are some body part that is dropped by a monster. Since players most likely won't purchase the item, it leaves only one group of buyers, the NPCs! If someone tells you an item is "Vendor Trash" this means you should sell it to the merchants. Of course they could just be insulting your item! Make sure you know the difference.

Old Equipment
Once you're done using an item, likely because you have found a better one, it's time to get rid of it. You have several options:
Hand-me-downs to a friend or guild mate
Lower level or poorly equipped players appreciate gifts. This can improve your standing with them, which might benefit you later on. If the item is bound to your character, your only choice is to sell the item to a vendor.

Auction
Sell the item in an auction. "One person's trash is another person's treasure." Your old items might fetch a hefty sum. Be sure that the item isn't soulbound to your character before trying to sell it.

Merchants
Anything you cannot give away, or sell to other players, should be sold to the merchants.

The Bank
Use the bank to store items. This will free up space in your bags. Store anything that you are not using or that you're unlikely to use. Future Upgrades - Some items have a level requirement above your current level. So you must wait until you level up before you can use them.
Items For Other Classes - Save items for friends or mail them to your other characters.
Don't forget that you can get additional storage by buying bag slots and filling them with the largest bags you can find.
Out of Room?
If you're out of room, it's time to make some decisions as to what to keep. Try to sell anything you can to other players. If you have some items that you've tried to sell but cannot, it might be time to sell them to the merchants.