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What is a domain name?
A domain name is a name given to a group of machines (e.g. paler.com). It is a convenient shorthand for how you might otherwise refer to them - using their IP addresses, e.g. 192.26.54.17.
Using domain names to identify web sites.
Buying a domain name allows you (and your friends or clients) to use a more memorable way of referring to your machines. Instead of saying "See my webserver at 192.26.54.17", you say "Checkout www.discount-bargains.com".
Using domain names as email addresses.
It allows you to specify where the mail for that domain goes. You can specify that mail to people at discount-bargains.com is sorted by your machine mail.discount-bargains.com.
Domains big and small
A domain name can just refer to one machine that you could share with other people. A mail server, web server and other things can be run on that single machine.
Using a single machine, you can set up different websites on different subdomains, the sites fire.paler.com and water.paler.com can both be on the same machine and display different pages. The machine will receive the requests for the two sites and respond differently to each request.
Domain names are rented
Domain names are rented, you own your domain for a limited time (2 years typically, with the option to extend it). For that time, you can specify where the mail goes and which machines are which.
