An ATM skimmer is a portable card reader that thieves attach to the front of a legitimate ATM (Automatic Teller Machine). The ATM skimmer is disguised as a normal ATM card reader. ATM customers are tricked into inserting their ATM cards into the skimmer and entering their PIN codes on the keypads.

The keypads are either replaced, or a hidden camera is placed to record the customers PIN as it is entered on the keypad.

The ATM skimmer either stores the card data, or uses a wireless transmitter to send it to a nearby receiver. Once the thieves have the data from the ATM card and the PIN, they can create a duplicate card and use it to withdraw money from the customers accounts.

You can identify an ATM Skimmer with the help this ATM Card Skimming and PIN capturing Awareness Guide [pdf]

Update: Also see this to know How a Card Skimmer Looks Like On An ATM