Encryption is the process of transforming data into an unrecognized or "encrypted" form. It's widely used to protect sensitive information so only authorized parties can see it. This includes files and storage devices, as well as data transferred over wireless networks and the Internet.
You can encrypt a file, folder or entire volume using a file encryption utility like GnuPG or AxCrypt. Some file compression programs like Stuffit Deluxe and 7-Zip can also encrypt files. Even common programs like Adobe Acrobat and Intuit TurboTax allow you to save password protected files saved in an encrypted format.
Encryption is also used to secure data transmitted over wireless networks and the Internet. For example, many Wi-Fi networks are secured using either WEP or much stronger WPA encryption. You need to enter a password (and sometimes a username) to connect to a secure Wi-Fi network, but once you're connected, all data sent between your device and the wireless router will be encrypted.
Many websites and other online services encrypt their data transmissions using SSL. For example, any website beginning with "https://" uses the HTTPS protocol, which encrypts all data sent between the web server and your browser. A secure version of FTP, SFTP encrypts all data transfers.
There are many different types of encryption algorithms, but some of the most common ones include AES (Advanced Encryption Standard), DES (Data Encryption Standard), Blowfish, RSA and DSA (Digital Signature Algorithm).
While most encryption methods are sufficient to keep your personal data safe, if security is paramount, it's best to use a modern algorithm like AES with 256-bit encryption.