Negative keywords help qualify traffic and make it more targeted. They do limit your traffic, but the traffic you do get will be more focused. This will prequalify your traffic before it clicks your ad.

A negative keyword is a word that you have decided not to show your ad for. You have regular keywords and phrases, and adding negative keywords tells Adwords not to display your ad when a negative keyword appears in the search terms with you keyword.

The most basic example of a negative keyword is the word free. Imagine an online retailer selling running shoes. That retailer may have the keyword phrase "running shoes" as a phrase match in their Adwords campaign. But, the retailer is obviously selling shoes, not giving them away. So, the phrase "free running shoes" may be undesirable. The retailer uses the negative keyword free and choose not to show his "running shoes" ad for any search containing the word free.

Why do you want to eliminate traffic? If your goal is just pure traffic, you may not want to limit your traffic. But if you are looking for qualified leads, negative keywords help you screen out unwanted impressions and traffic. Screening out traffic means that a consumer who is unlikely to make a purchase with your website doesn't click on your ad. That can save you wasted clicks. But, negative keywords also stop the ad from appearing, which reduces the impressions of your ad. The CTR measures the clicks per impression, so if you limit the impressions of your ad to targeted traffic, your CTR should improve.

Continuing the running shoes example, a keyword search turns up the phrase "running shoes clipart". The retailer is not interest in consumer looking clipart. You would not wants impressions or clicks from someone looking for clipart. So, clipart is a good negative keyword.

You establish negative keywords at the campaign or ad group level. At the ad group level, you are eliminating impressions of you ads for all searches with the negative keyword. At the campaign level, you are applying the negative keywords to all ad groups, which filters down to all keywords.