What you need to know:
Proxy servers are a way to forward your browser activity through another computer so that the destination site can't see your own computer's IP address. It's an old fashioned way to hide your identity, and it's used primarily for web-based activity. The Anchordudes don't recommend them any more because they can now be back-traced pretty easily, and a large number of the them (particularly the free ones) are actually run by or infiltrated by criminals who use them to listen in on all the traffic that goes through them, including passwords. You think you're increasing your security by hiding your IP, when in reality you could be actually giving all your data to a hacker, Great idea in the 90's and early 2000, but outdated and even dangerous now.
If you still want to try out a proxy server service, click here for a list of proxy server companies.
More than you wanted to know:
Everything connected to the Internet has a unique address: an IP address. Web page servers, email servers, usenet servers - they each have an IP address. So does your own connection to the internet - whether a cable modem, a DSL box, or whatever. There are ways the Internet and ISP's share addresses among different devices, but in general, any traffic on the Internet can be tracked back to the computer that sent it and the computer that was meant to receive it. The addresses and activity can be analyzed in real time or even be logged for future reference.
That means that every connection you make can be tracked back to your home or business connection by the IP address. Your IP address can also be used by a server to deny you access to a site, like if you've entered the wrong password too many times at a member site. And finally, your service provider (either an ISP or perhaps your employer if you are surving at work) can prevent you from connecting to certain destinations (like Facebook) based on the destination's IP address.
A proxy server is a way to pass all your web activity through an intermediary server, so the computer at the final destination only see's the intermediary IP address, not your own. And at the same time, your internet provider only sees the proxy server's address, not the final destination.
Proxy servers are primarily just for web surfing, they don't provide protection for Usenet or Peer-to-Peer activity. You can use a proxy server either by changing some settings in your browser to forward all web requests through a remote server company, or use a web-based interface by going to a proxy service website and typing your destination address in to a form. Pretty simple, huh?
But there are some downsides - particulary speed and reliability. If everything is going through that proxy server, and there are lots of other people using it too, it becomes a bottleneck. And even if the server is fast, the backbone connections to the server have to be very big to handle the throughput. And now that people are doing more streaming of videos and such, the problem has gotten even worse - especially for the smaller and free services. Many free and low-cost proxy server services only allow text to pass through, stripping out images and video traffic.
Another downside is security. Instead of connecting directly to your bank, gmail account, or even that membership porn site, you'll be forwarding all your information through someone else's computer along the way. You better be very sure that their intentions are pure. While we'd feel pretty safe with most of the pay sites, any free proxy server is VERY suspect in our eyes.
Additionally, while your traffic will have a new IP address on it when it gets to the destination, the packets of data themselves can be snooped on their way from your computer to the proxy server itself. If there is any place that a hacker would want to concentrate their efforts on cracking, it would be the traffic in and out of a proxy server - it's already packaged up and easy to read. This is why using a VPN service is so much better. Some proxy services can use a basic SSL encryption to reduce your vulnerability though, so look for this feature. Unless some form of encryption (SSL or VPN's) is involved, a proxy server is actually a way of painting a target on the back of each packet you send
There's also the problem of advancing technology. Many of the cheaper or free proxy services simply embed your IP in the packet they send to the destination, so they know where to reforward it when it comes back. Most web services that want to track your IP know how to strip this back out, so they can still find your real IP address. There are other methods they can use as well to track back your activity, going as far as to snoop on the pipes in and out of the proxy service's server to match incoming and outgoing traffic. Advanced forwarding services can overcome these approaches, but they cost money.
And finally, there's the problem of interactive websites (like game sites, etc). Nearly all proxy server services have serious trouble with interactive websites with Flash, AJAX, and even javascript. New sites are designed to send data between your browser and the end server in real time, and proxy servers mess up that data flow.