Trojan Horses ( or simply Trojans ) are computer programs that that disguise themselves to be useful software, but instead they compromise your security and cause a lot of damage. They differ from viruses in that they are not usually designed to replicate like a virus and infect other computers. Trojan horses are very deceptive and are very good at hiding deep into your computer. They do their damage silently.

What does it do?

Trojans allow hackers to take control of your computers by installing back doors. They can also intrude your privacy by capturing your keystrokes and sending these sensitive information to a hacker in a remote location. These enable the hacker to easily access your email and bank accounts. If these information ends up in the wrong hands, a victim may be subjected to blackmails.

Since the Trojans are very deceptive, one may never know whether he has already been attacked or attacking someone else unknowingly. Hence, Trojan horses pose a serious threat to computer security.

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The origin of the term

This term actually comes from the a Greek legend, in which the Greeks gave a giant wooden horse to their foes, the Trojans, as a peace offering. However, once inside the city of Troy, Greek soldiers sneaked out of the hollow horse and captured Troy. Similarly, a Trojan appears to be a useful computer program, while it actually wreaks havoc.

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The mechanism

Trojan Horses are propageted in the form of a desirable program. When a person, opens the program, he gets infected. These programs can be anything such as a free game, movie or a song. The critical factor is that these programs must be convincing enough to make an unsuspecting user open it. Most victims usually download a trojan from a website, an email attachment or a peer-to-peer file sharing program.

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Reference

What is a Trojan horse?
http://www.webopedia.com/TERM/T/Trojan_horse.html

What is a trojan?
http://www.anti-trojan.com/