Spyware is a rather snoopy and clandestine piece of software that gathers information about the victim --- a person, computer or an organization without permission. The egregiousness of the spyware is rather difficult to mention, but spyware can do anything from harmless peeking to tinkering with the computer/application settings or configuration.
The above definition is as broad as an airplane hangar and can be subjective indeed. But perhaps it would be easier if you think of spyware as software that spies, collects information and periodically sends this information back to the intended location ( a computer, a user or some server elsewhere).
Spyware can be nasty or can be harmless and the extent of havoc that would be unleashed can be determined by the kind of spyware residing in your system. However, some of the common spyware are used to track your website surfing habits and keep tab of the information you tend to seek. One such common example is an “ adware" which are used mainly for commercial purposes. Adware tracks the kinds of websites a user visits and to see if these users patronize or click on any of the ads in question.
A much more egregious kind of spyware is “ Key Loggers" which record every key stroke a user makes and all of this information is passed on to the hacker who is looking to gather as much information as possible. This information can be anything from User Ids, passwords, Credit Card Details, Bank Account Details and much more, unknown to the victim.
On an other malicious level though, spyware can tinker with computer configuration like alter the browser's home page ( Xupiter is a persistent spyware example which does just that). This kind of Spyware is also called Scumware. Scumware also interjects itself into the browser as a plug-in and starts to impersonate fake banner ads ( those leading to some of the hacker's affiliate sites, for instance) and sometimes have text appear like hyperlinks so that an unwary user just clicks on these links to be led to visit certain affiliate sites, commercial advertisements and the like. An article titled " 5 Specific Ways Spyware Finds Its Way In" discusses exactly how Spyware Infiltrates your systems.