what does reference voltage mean, on a ADC chip

So i will be using AD7992. It has the option to set a reference voltage, or make the reference voltage the source voltage (which is +5V). What exactly is reference voltage ? Will it my chip be able to read a signal at +2.5V ?

All the ADC readings are ratiometric with respect to Vref. If Vref is 5V, then 2.5V would be produce a reading of 2.5/5.0*((2^n)-1), where n is the number of bits. If Vref is 3V, then 2.5V would read 2.5/3.0*((2^n)-1).

As MikeML stated, the ADC readings are referenced to Vref. Thus the accuracy of the A/D conversion depends upon the accuracy and stability of Vref. If you aren't too concerned about absolute accuracy, then you can use the source voltage for Vref. If you need absolute accuracy, then you will need to generate an accurate/stable Vref voltage. Many A/Ds have a built-in stable Vref so you don't need an external voltage.