Your cell phone has two primary connection methods - wifi and cellular.
When you're connected to a cellular network, your wifi is not in use. Enabling hotspot turns on our wifi and allows you to share your cellular connection with devices you connect via wifi. You're turning your cell phone into something very similar to your home router with this.
Example: You're in the mall with your cell phone and a laptop. Your cell phone has cellular service (4G or something) but no wifi signal. You turn on mobile hotspot mode on your cell phone, it creates a new wireless network "x", and you connect your laptop to the "x" network. Now when you surf the internet on your laptop, it passes the data to your cell phone which passes it along to your cellular network.
If your cell phone is connected to a wifi network, then the wireless part of your cell phone is in use and couldn't function as a hotspot without disconnecting from the wifi network.