Favicons are icons that appear next to the address in most web browsers and next to the bookmarks/favorites in the link bar and in your list of bookmarks or favourites.
While many browsers will automatically look for a file called favicon.ico in the root of your website, you can help them along or specify a different filename or path by adding the following line in the <head> section of your web pages:
<LINK REL="SHORTCUT ICON" HREF="http://www.yourwebsite.com/favicon.ico" />
Don't forget to replace "www.yourwebite.com" with the address of your website.
Creating a favicon.ico file
Favicon.ico files are 16 by 16 pixels. This isn't a lot of real-estate to work with so your icon will need to be pretty simple. One way to create it is to find a small image and shrink it down using a tool like Irfanview.
Now I have tried many icon generators and one of the best and easiest ways to create a favicon.ico is to head over to the DeGraeve Favicon Generator. It's web based so there is nothing to install and I have yet for it to die or mess-up my favicon.ico file. Give it a try!