Spyware is a relatively new issue related to the Internet, and is similar in many ways to viruses - but technically spyware is not a virus. As a result, virus scanners and firewalls will not protect you. Viruses spread on their own, whereas Spyware is technically installed by the user (most often by accident).
There is an excellent video here provided by Microsoft that explains spyware.
If you have ever had an abundance of advertisements appear while you are working, or new "search bars", "date managers", or other software that does not perform any useful function - it is most likely Spyware.
Spyware is created by groups including advertisers, criminal gangs, pornographers and hackers. It is created for the purpose of putting advertisements on your screen, dialing expensive 1-900 calls from your modem, recording your activity ("spying") and sending that information back to them for financial gain. Some spyware has also been known to send personal accounting, tax, and credit information. A threat more severe than spyware is often classified as Malware and it will do things like use your computer to send spam and scams or be used by a hacker to impersonate you so they can commit crimes in your name.
Some signs that a program may be spyware are anything with the word toolbar in it, gambling related, or anything that is from a less than reputable source. However, new spyware appears as often as new viruses do. The number one source of Spyware and Malware is file sharing software like Bittorrent and Limewire.
To avoid spyware and malware:
There are many utilities that claim to prevent pop-ups and remove spyware. Unfortunately, many of these products are spyware themselves - and only solve oneproblem to create another.
Our preferred solution is to use a reputable security program and most importantly use safe browsing habits online. Do not use file sharing programs and do not install any programs or software on your computer unless you know exactly who it is from.
If you see a window pop up while you are browsing that asks your permission to install something, be very careful before agreeing. Most of these windows are spyware, with a few exceptions (such as the link above: "Windows Update").
While browsing the internet, it is best to be cautious - do not agree to anything that you do not understand, and if someone is offering you a free software, know that there is often a catch to it.