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As defined at wikipedia.org on 2/15/08, cache is "a temporary storage area where frequently accessed data can be stored for rapid access."
CMS uses caching at a few levels. It may cache individual content elements or entire pages as they display in your browser. It caches many files, especially image files. It also caches URLs. It caches configurations used in the backend and the page template.
Why does it do all this?
To reduce the amount of time required to display a page in your Web browser. To display a page for the first time, CMS must
Retrieving and processing this for every visitor that comes to your site would cause significant "load" on the server and cause delays to view pages. Saving the generated page in a cache means the page can be quickly displayed to visitors.
This comes at the expense of occasionally requiring you to manually clear caches, forcing CMS to rebuild the page it displays to visitors. Generally, a manual cache clear is only required when a page name is changed or when a page is moved (since navigations for pages not directly affected will not be rebuilt).
CMS automatically clears its internal caches at midnight daily, which is why you may notice that, without manually clearing cache, some actions take "overnight" to be visible on your site.
Your browser (Internet Explorer, Firefox, etc.) caches pages and files so that you don't need to re-download them every time you view the page or file. This means that if a page or linked file is updated, you may need to clear your browser cache to view the changes. The simplest way to do this is to hold the shift key down while clicking the refresh/reload button in your browser.