Compression is a subtle effect primarily for electric guitar where the highest and lowest points of the sound wave are "limited". This boosts the volume of softer picked notes, while capping the louder ones, giving a more even level of volume. This is frequently used in country music, where fast clean passages can sound uneven unless artificially "squashed".

Another effect of compression is that it expands the length of a held note, or its sustain. Imagine a constant flow of water through a garden hose. If you put a cork in the end of the hose, with a small hole through it, the water will squirt out of the hole much faster/further than it originally was out of the hose. This is essentially what is happening to the guitar's signal.