A "compressed folder" is just Windows XP's name for a zip-file containing one or more other files. They take less place but more time to open than if you don't zip them.
The only real use of a zip-file is to put things in when you send them by email, or to save diskspace if your disk is getting full and you expect not to use the file for some time, but don't want to delete it either.
Note that mp3 and jpg doesn't compress well. The zipped version takes about the same space as the original. But MS Office files compress very well.
Hope this helps.
And what is it's purpose? Could you give an example of when to use it? Thanks