A proxy server acts as an intermediary between a client and the server they want to access. It intercepts all requests to the real server to see if it can fulfill the requests itself. If not, it forwards the request to the real server. Proxy servers improve performance by caching frequently requested content and filtering requests according to rules. Common types include HTTP, FTP, and SOCKS proxy servers. Proxy servers have advantages like improved performance and request filtering but also disadvantages like possible security risks, bandwidth usage, and speed issues.