If you were not following with workspace files, would you just create your files through the hosting server?

If you were not following along with the workspace files, you would need to create your website on your computer locally. You'd need write up all of your code in a text editor like Sublime Text or Brackets and save your files on your computer. If you have purchased a hosting plan from a provider, then you would use Cyberduck or a similar FTP client to upload your files to the server as Nick demonstrates in the video.

You definitely do not want to use a word document, as there is extra code that you don't see that is added to a word document that will mess with a your code.

At a minimum, you would want to use notepad, but I wouldn't recommend that. Like Jacob said, you should use a text editor like Sublime Text, Brackets, or Notepad++. These text editors are designed for coding and work with many types of code (html, css, javascript,php, and more). They have syntax highlighting, which will allow you to read your code more easily, along with help to find errors. Plus, they have some 'auto-complete' type features that will give you a closing tag after you type your opening tag. And there are a bunch of other awesome features, too. These editors can also be used for free - Sublime Text 2 is what I use, but I've also used Notepad++ and liked that too.

While just learning/practicing along with the videos, I wouldn't worry about hosting with an actual hosting server. When you save your html with the .html extension, you can then open that file directly in the browser. Follow the file structure that they are using in the video and you will be able to follow along just as if you were using Workspace. This is what I do. :-) When you start getting into server-side languages, like PHP, that will require a server, but they will walk you through installing it on your own computer and using it, so again, you will not need hosting.

Finally, if you do want to host a live site, check out http://webhostingforstudents.com/ as they have a low price and discount for Treehouse students. Great place to start! :-)