(Please see my PROTECTION GUIDE for specific recommendations.)

Spyware...
Spyware is not designed to do any damage to PCs but it often does have a detrimental effect on speed and processing power. Much of it is poorly designed and because of this can cause your system to crash unexpectedly or "hang" for long periods of time.
It is primarily designed for marketing and silently tells the companies who make it what your shopping habits are. These companies argue that it is beneficial to the consumer because with this information, they can "target" their advertising. What they fail to acknowledge however, is that their spyware slows down your PC and if pages are taking longer to load then your whole online experience can be slower. Should any of us really be sacrificing our time to feed a company's desire to generate higher sales?

Malware...
Malware is different from spyware as it is malicious by design. Malware can include "trojan horses" that enable remote control of your PC and then disable your firewall and/or anti-virus so that chances of it being discovered are lowered and even more malware can be uploaded without being detected by your PC's defences. Once your PC has become infected, it can become a member of a "botnet" and then it will join hundreds of thousands of other PCs which send out spam and "phishing" emails, attempting to steal peoples' passwords and bank account details. A keylogger can make a record of every keystroke that you type and the log file with that record is then forwarded for analysis. If this were to happen your login details become known and your bank account could be "raided".

Viruses...
Viruses or "Worms" are usually written by kids with too much time on their hands. They are mostly designed to do silly things like remove your ability to use the right-click context menus in certain applications. They can have many malicious effects from knocking out your ability to print to rotating your display. On their own, viruses are no longer the problem they once were. Good anti-virus software will catch most of them. However if anti-virus software is no longer functioning correctly, maybe because a trojan has been used to allow remote access to the PC and then a "dropper" uploaded to plant more malware, then viruses can potentially ruin a Windows installation.

Remote Access Trojans (RATS) ...
There are two basic types of trojans. Most are used in an attempt to gain control of the PC for illegal purposes. Once inside, they will disable defences and then download malware automatically and install it.
A "playful" variety of trojan is the "Sub7" type and these are not so common as they once were, maybe because and form of "hacking" is taken seriously now by those who have the responsibility to "police" the net.
"Sub7" and variants of it are "injected" into a PC by some form of delivery method, be it email or from a visit to a webpage where it resides as "active content". It can be downloaded by anyone with no hacking knowledge at all and used to connect to your desktop remotely. I use a similar thing called "Radmin" to help diagnose problems for clients. The difference is that the software that I use is always installed with the client's knowledge and permission. It also gives a warning that it is about to be used. When it is used, I can see the client's desktop and mouse moving around. I can also see everything that is typed. "Sub7" does pretty much the same thing but hides itself completely from the task manager and you simply wouldn't know it was there. When someone "owns" your PC in this way, it is unlikely that they will want to damage what they "own" and so detrimental effects are usually minimal. It is not very nice however, to think that a stranger could potentially be watching every move one makes!

Protection...
Many people believe that if they spend money on an anti-virus package then they must be getting something good but this is not always the case. I wouldn't touch the two best known commercial anti-virus software packages with a barge pole. The ones that I have in mind are huge bloated installations that can actually cause your system to slow down.
The applications that I use are free and in tests that I've conducted myself I've found them to be generally much better than any of the commercial software that I've tested.