In more detail
Steganography is the practice of hiding a message inside another harmless-looking file, such as an image, audio clip or document. Unlike Encryption, which scrambles content but is visibly there, steganography hides the very existence of the message. A common method changes the least significant bits of image pixels, which the eye cannot notice. Other methods hide data after the end of a valid file, in unused header fields or in the spacing of text. Analysts look for statistical oddities, unusual file size and data appended after the end of a valid file, using the image forensics tool and the binary forensics tool.
Why it matters
It lets data leave a network or be passed in public without raising alarms, and malware sometimes hides payloads or commands inside ordinary images. For an investigator, a file that is oddly large for its content or has bytes after its end marker deserves a closer look. Detection is a matter of evidence, and a clean result does not prove that nothing is hidden. Hiding an encrypted message gives both secrecy and deniability.
Example
Hide the text "Hi" (bits 01001000 01101001) in the lowest bit of 16 pixel values:
before: 182 201 77 90 255 14 33 120 ...
after : 182 201 76 90 255 14 32 120 ...
Each value changes by at most 1, which is invisible. A 1920 x 1080 RGB image has 1920 x 1080 x 3 = 6,220,800 values, so at 1 bit each it can hide 777,600 bytes. Related: Magic bytes, How File Signatures (Magic Bytes) Work.