Compression is an often overused tool for controlling the dynamic range of a signal. It has 4 parameters- threshold, ratio, attack, and release. Let's say the threshold is set at 100db and the ratio is 3:1. The attack is 5 milliseconds, and the release is .5 seconds. Until the signal exceeds 100db for at least 5 milliseconds, the compressor does nothing. When the signal exceeds the threshold, for every 3 db above 100, the compressor will allow 1. When the signal drops below 100db, .5 seconds later, the compressor will go into standby mode.
As suggested above, certain compressors act as a filter, modifying the sound even when they are not acting as a compressor. This can be good or bad. The optical compressors in the Joemeek line are well known for this, and you either love them or hate them. A problem with cheap compressors is artifact, when you can actually hear it when it kicks in (or out). The FMR audio RNC is pretty much the benchmark for a cheap, clean, compressor that works, a $179 no-brainer.
When the ratio is very high, say 20:1, it is called a limiter, sort of a brick wall instead of a soft ceiling. A note on tracking- many engineers prefer to add compression after tracking, because once employed, you really can't undo it later. Lastly, to the best of my knowledge, it won't do diddly about finger noise on a guitar, although judicious EQ may help there.-Richie