I do not want to go into too much detail in this article but let's get the basics down.
Cookies are small text files that are generated by a Web page and stored on the client's hard drive.
These cookies can then be accessed by the server the next time a visitor returns to the site. They can store personal information, payment information, remember the fields you filled out in a form, what ads you clicked on, or just about anything you as the designer want. For whatever reason, there is this huge fear among users that they will be personally identified and watched based on their behavior. It is indeed possible to track behavior, but to personally identify is impossible if you never tell the site who you are. We would not have half of the problems with privacy that we have if Web sites would be open and honest about what they do with visitor information.