"Memory" means short-term memory for computers. In contrast, hard drives provide long-term memory.
Everything your computer is actively working with has to be in active memory. Of course a large number of Windows files are "loaded" into memory at startup. When you start a program, Windows loads many of the program's files into memory. When you press a key on the keyboard, the CPU loads the corresponding character into memory. When you "save" a document, the CPU "writes" it to the hard drive, but it remains in memory too. The CPU is obviously the component that does all the "thinking". But just like your brain, it can't produce results until it gathers the details into short term memory.
If the CPU needs more memory than is installed in the computer, it shifts content it isn't using at the moment to "virtual memory". Virtual memory is located in the "swap file" on the hard drive. It's called swap because Windows "swaps" memory contents between physical memory and this virtual memory.
For example, if you have two large programs open and switch from one to the other, Windows may need to swap the one you were using out of physical memory into virtual memory. Then it brings the one you want to use now out of virtual memory and puts it in physical memory.
All this swapping takes s lot of time because hard drives are much, much slower than physical memory. More memory speeds up your computer because less time is wasted accessing the hard drive.
Don't be confused by the "Free Memory Myth". Yes there are programs that can "free up memory", but that's just the opposite of the best way for Windows to manage memory.
You'll improve the performance (speed) of your computer more by increasing memory to 1024 or 2048 MB, than by getting a faster processor. Don't go beyond 3072 MB unless you're sure you have 64 bit Windows, because 32 bit Windows can't use more than about 3,500 MB.
If you're buying a new computer look for at least 2048 MBytes of memory. If you want higher performance get a 64 bit computer and 4096 MB or more of 800 MHz or faster DDR SDRAM (Synchronous Dynamic Random Access Memory). The keyword here is DDR (Double Data Rate). 4096 MB is the size. 800 MHz is the data rate.
Thinking about adding memory to upgrade your computer? Don't buy cheap memory -- it's often the source of mysterious PC problems. Crucial Technology has tier memory at a good price. Their website makes it easy to find the right memory for your computer, or other devices like digital cameras.
Memory America is a highly rated supplier that has excellent customer service. They also make it easy to find the right memory for your computer, and their prices are very competive.
The "Memory Configurator" at Shopper.com is another way to locate the memory you need. There are links on buying and installing memory there too. Or try Kingston, who also sells good memory. Get a good price for memory at Newegg.com.
The hardest thing about installing memory is getting it seated properly. In my computer, just getting at it is a problem. In the case of memory that pivots into place, it's not easy to see exactly how to do it. Memory that plugs in straight is often hard to seat, and if you don't get it started right, you can break the socket or the motherboard trying to force it in. Check out these illustrated instructions at Crucial Technology. If you've never done it before you may want to get someone to help, or get it done at a shop.
Before you start to install new memory, before you even open your new memory package, read the ESD precautions on the upgrade page.
See Rob Williams' Computer Memory Upgrade guide. This is a very complete reference.
Japanese Proverb: If you believe everything you read, you'd better not read.