Spyware (sometimes called malware) is software loaded secretly or sneakily into your system through your Internet web browser.
Visit a site on the net (especially if you use Internet Explorer) that uses ActiveX or other 'improvements', or download a program and install it, and you can find yourself with thousands of new Registry entries and new programs you didn't know were coming, monitoring your Internet use, searching through your personal data and sending that private data off to other sites who can use it for fraud or abusing your credit. No, I'm not kidding.
Firefox and Opera are more immune to this abuse, but they don't stop everything.
Yahoo adds Anti-Spy to their toolbar (but which does other things to your system).
Anti-Spyware tools reviewed: 1 2 3 4
And, my favorite freeware tool, Spybot Search and Destroy