An IP address is equivalent to your postal address and just like the mail service, each computer has an address so that it will only receive the information that is send by someone else.
Your IP Addresses are represented as 192.168.1.7 as this is the system that is understood by computers. The address is split into 4 parts known as "octets" and each of the octets can be numbered from 0-255, providing a total of 4,294,967,296 potentially unique IP Addresses.
Now, while 4.2 Billion might seem, But ISPs and large Universities that have been reserved ip address for special purposes and are not usable, so the real amount is less than 4.2 billion.
As I mention earlier some blocks of addresses had been reserved for special purposes, one of these purposes was for private networking and it is these private addresses.
Private IP address ranges
The ranges and the amount of usable IP's are as follows:
10.0.0.0 - 10.255.255.255
172.16.0.0 - 172.31.255.255
192.168.0.0 - 192.168.255.255
So, what are these addresses and how do they work?
For example, if I had 6 computers that I wanted to connect to network, I might number them from 192.168.0.1 up to 192.168.0.6 and this would still leave over a million more addresses that I could use if I were to buy some more computers or if I was networking a large office and needed lots and lots of addresses.
These blocks of addresses can be used by anyone, anywhere - even if your neighbor is using the exact same addresses this won't cause a problem. This is possible because these addresses are known as "non-Routable addresses" and the devices on the internet that move data from one place to another are specially programmed to recognize these addresses.
These devices (known as routers) will recognize that these are private addresses belonging to your network and will never forward your traffic onto the Internet so for your connection to work; you will always require at least one real address from the general pool so that your home router can perform what is known as "Network Address Translation".
NAT is a process where your router changes your private IP Address into a public one so that it can send your traffic over the Internet, keeping track of the changes in the process. When the information comes back to your router, it reverses the change back from a real IP Address into a private one and forwards the traffic back to your computer.
Private addresses and NAT is what makes your home router work and by using them, anyone is able to connect as many computer's as they wish to the Internet without having to worry about running out of addresses and this gives everyone many more years until all the available addresses are used up.