What ICO files are
ICO is the icon format of Windows and the classic format for website favicons — the small picture in the browser tab. One ICO file can hold the same icon in several sizes, so Windows and browsers can pick the size that looks sharpest in each place.
What happens when you convert
Your PNG is drawn into six square sizes: 16, 32, 48, 64, 128 and 256 pixels, and all six are packed into one .ico file. Non-square pictures are scaled to fit and centred on a transparent square, so nothing is stretched, and transparent areas of your PNG stay transparent.
Using your icon
For a website, upload favicon.ico to the main folder of your site; most browsers find it automatically, or you can add a link tag in your page head. For Windows, right-click a shortcut or folder, choose Properties → Change Icon, and select the .ico file.
Common problems and how to fix them
The icon looks blurry in the browser tab: at 16 pixels, detailed logos become unreadable — use a simple symbol or one letter. The browser still shows the old icon: browsers cache favicons; clear the cache or open the site in a private window. White edges appear: use a PNG with a truly transparent background.
Good habits
Design icons as simple bold shapes, start from a square PNG of at least 256 × 256 pixels, and test how the icon looks on both light and dark backgrounds.