Ethernet switches increase network performance by decreasing
the amount of extraneous traffic on individual network segments
attached to the switch. They also filter packets a bit like a router does.
In addition, Ethernet switches work and function like bridges at the MAC
layer, but instead of reading the entire incoming Ethernet frame before
forwarding it to the destination segment, usually only read the destination
address in the frame before retransmitting it to the correct segment. In
this way, switches forward frames faster than bridges, offering less delays
through the network, hence better performance.
When a packet arrives, the header is checked to determine which segment the packet is destined for, and then its forwarded to that segment. If the packet is destined for the same segment that it arrives on, the packet is dropped and not retransmitted. This prevents the packet being "broadcasted" onto unnecessary segments, reducing the traffic.
Nodes which inter-communicate frequently should be placed on the same segment. Switches work at the MAC layer level.

Switches divide the network into smaller collision domains [a collison domain is a group of workstations that contend for the same bandwidth]. Each segment into the switch has its own collision domain (where the bandwidth is competed for by workstations in that segment). As packets arrive at the switch, it looks at the MAC address in the header, and decides which segment to forward the packet to. Higher protocols like IPX and TCP/IP are buried deep inside the packet, so are invisible to the switch. Once the destination segment has been determined, the packet is forwarded without delay.
Each segment attached to the switch is considered to be a separate collision domain. However, the segments are still part of the same broadcast domain [a broadcast domain is a group of workstations which share the same network subnet, in TCP/IP this is defined by the subnet mask]. Broadcast packets which originate on any segment will be forwarded to all other segments (unlike a router). On some switches, it is possible to disable this broadcast traffic.
Some vendors implement a broadcast throttle feature, whereby a limit is placed on the number of broadcasts forwarded by the switch over a certain time period. Once a threshold level has been reached, no additional broadcasts are forwarded till the time period has expired and a new time period begins.
Back Pressure Switches
Switches often employ buffering of packets. This is done so when packets
arrive for a busy port, the packet is temporarily stored till the port
becomes free. When the buffer becomes fill, packets become lost.
Back pressure switches overcome this problem by sending the overflow packets back to the workstation. This effectively slows the workstation transmission rate, and hence slows the arrival of new packets at the port.
Any traffic generated by these workstations can be sent to any other workstation in that domain. Workstations outside that domain are unable to see any packets (including broadcasts) that belong to the secure domain. Obviously, this has enormous implications for developing secure networks. Multiple virtual workgroups can exist, like email and www server. Users can belong to more than one virtual domain, thereby administration is centralized and security is maintained. The use of switch technology makes this possible.