"Thinning" means that after seeds are planted, some of the resulting seedlings are removed to allow the remaining plants to grow better.
Roots allow plants to access water and nutrients. Many plants in a small area means that roots will struggle to develop, potentially stunting plant growth.
When many plants are crowded together, they compete for the water and nutrients available in the soil. Thinning your annual plants will mean better survival rates in your garden.
When many plants are close together, shorter plants may end up shaded from the sun. This affects their potential for photosynthesis, since the process is driven by light hitting the leaves.
Diseases caused by fungus attack plants that are wet most of the time. Air cannot circulate easily through close plants and dry them, so they will be more prone to fungus.