It routs the data you send through the internet via other computers thus hiding your true location.
It is good if you get your IP banned from a board because the proxy IP is what is recognized. Also, it is good for buying things like steroids in the US, or pork in a Muslim country, and other items that might not be legal in some countries. For example, if you use the proxy server to check your E-mail, and your ISP records the IP address, it is recording an IP address that is not yours.