What is Click Fraud?
Internet Marketing Dictionary | Click Fraud

Click Fraud is the process of clicking ads paid for by a competing advertiser in order to inflate his or her costs artificially. It is also the process of clicking AdSense ads on your own website in order to inflate your own AdSense income, again at the expense of the advertiser.

Agressive advertisers sometimes click AdWords ads of competitors in order to use up their advertising budget on valueless traffic. This then leaves the agressive advertiser free to advertise without competition, a situation that can make his own clicks much cheaper. The risk is highest where competition is greatest and where individual clicks can cost tens of dollars.

The search engines aim to crack down on click fraud hard because if it became very widespread it would significantly reduce the willingness of advertisers to use PPC advertising.

AdSense click fraud is also monitored closely by Google and it is part of the Terms and Conditions of becoming an AdSense publisher that you agree never to click on ads on your own sites.

See also this article on how to reduce AdWords click fraud.