Just so there’s no confusion, version history—one of the most powerful tools that comes with SharePoint—works in a very specific way. Namely, it records a new edition of your file (any file, not specific to Microsoft Office file types) in a SharePoint library. It does not track changes within a file.
Track changes is a specific function that comes built in to Microsoft Word. It records and displays actual changes within a Word document. Track changes looks like the screen shot below, which comes from this great overview article of how to track changes like a pro. Though I question the author’s use of a .doc and not .docx. I will assume it was a simple mistake. (Also, make sure to mute your speakers because, annoyingly, this page has an auto-playing video. Ugh.)
To be clear, version history is something that SharePoint does. If you’ve used track changes in Word before, you know that keeps a history of the changes made to a document. But it’s a function that lives in Word, not in SharePoint. Assuming track changes is toggled on in a Word document, your edits will remain with that document no matter where the file is stored (e.g., SharePoint, a shared drive, a flash drive, even a freaking floppy disk if the file fits).
Version history, however, is specific to SharePoint. And it doesn’t track what changes have been made in a document. It records the big-picture changes to the file: namely its version number, the file size of the version, as well as who created the version and when.