In typography, letter-spacing, also called tracking, refers to the amount of space between a group of letters to affect density in a line or block of text. Tracking is the adjustment of space for groups of letters and entire blocks of text. Use tracking to change the overall appearance and readability of the text, making it more open and airy or more dense.
Letter-spacing can be confused with kerning. Letter-spacing refers to the overall spacing of a word or block of text affecting its overall density and texture. Kerning is a term applied specifically to the adjustment of spacing of two particular characters to correct visually uneven spacing.
Tracking often changes line endings and shortens lines of text. Tracking can be further adjusted on individual lines or words to improve hyphenation and line endings.
Tracking should not replace careful copyfitting. Use tracking adjustments carefully and avoid extreme changes in the tracking (loose or normal tracking following by a line or two of very tight tracking) within the same paragraph or adjacent paragraphs.
Kerning and tracking are two related and frequently confused typographical terms. Both refer to the adjustment of space between characters of type.
Kerning is Selective Letterspacing
Kerning is the adjustment of space between pairs of letters. Some pairs of letters create awkward spaces. Kerning adds or subtracts space between letters to create more visually appealing and readable text.
Creative Letterspacing with Kerning and Tracking
Kerning and tracking can also be applied to text to create special text effects for headlines, subheads, newsletter nameplates, and logos.
Exaggerated tracking can produce an effective and eye-catching title. Extreme kerning or over-kerning creates special effects with tightly spaced or overlapping characters, perhaps for a newsletter nameplate.
Here is a great little write-up on the basics of spacing and another on kerning.