There are several ways to view movies using the VLC player app on Apple TV. It's free but it has its downsides.
If all you want to do is click on a movie and just watch it, it does the job. Now if you are a power movie type, it's not for you, because it will not playback certain audio formats since they are licensed, nor does it give you a fancy movie synopsis or the ability to use playlists (speaking of the Apple TV app version regarding playlists).
VLC won't play DTS audio, it needs to be AC3, which means you have to re-encode (aka downgrade the audio). That's why most of the other alternatives aren't free... licensing fees. Pretty much every Blu-Ray Disc uses DTS audio and perhaps some modern DVDs.
If you're not an audiophile and don't care about snazzy menus, VLC is a respectable free player.
The ideal way to store your movies is on a media server such as a NAS, in the cloud (if you have money to burn), or on a hard drive with remote access. The Apple TV itself is a poor storage location as movies can easily eat up TBs of space.