As with any security tool, it's important to understand the limitations of a VPN. After all, you wouldn't expect a kevlar vest to save you from falling out of an airplane or a parachute to stop a bullet.
When you switch on a VPN, your traffic is routed through an encrypted tunnel to a server operated by the VPN company. That means that your ISP and anything (or anyone) connected to your router won't be able to see your web traffic. From the VPN server, your traffic exits onto the public internet. Unless you're headed to a site that uses HTTPS, your traffic is no longer encrypted.
Because your traffic appears to come from the VPN's server, your actual IP address is effectively hidden. That's important, because IP addresses are distributed geographically and can be used to find your rough location. If someone checks your IP address, they'll see the IP address of the VPN server. This can come in handy if you want to spoof your location. By connecting to a VPN server in London, you can make it appear as if you were accessing the internet from the UK.
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What a VPN won't do is completely anonymize your traffic. To do that, you'll want to use a service such as Tor. This excellent anonymization service is most easily accessed through a special version of the Firefox browser. Instead of just piping your data through a single intermediary (such as, a VPN server) Tor bounces your data through several different volunteer computers. This makes it much harder for someone trying to track your activities to see what you're up to.
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