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A SIM card (short for subscriber identity module card) is a portable memory chip used in GSM phones. It is a crucial component in mobile telecommunications as it identifies and stores the telephone number and connects the cellphone to the mobile carrier's network. Since SIM cards also have a (limited) memory element, they can also be used as portable stores for one's phone contacts.
A SIM card is small and rectangular, about 25mm by 15mm, and notched at one corner. This feature ensures a handy, fail-safe way of inserting the card correctly into the corresponding slot in a mobile phone.
There are two competing technologies for mobile phones. The most prevalent one when looking at the worldwide picture is GSM (Global Standard for Mobiles), which is mainly used in Europe, Africa, South America and parts of Asia. Its competitor is CDMA (Code Division Multiple Access), which is more widely used in the USA and parts of China. (Note that most regions do not exclusively use either one or the other, but that the 2 technologies frequently coexist from different mobile providers.)
GSM mobile phones use SIM cards, while CDMA phones use RUIM (Re-Usable Identity Module) cards. The two standards are incompatible with each other, though there are industry efforts to produce devices that can work with both. The concept of SIM cards offers a major portability advantage. If you want to switch from one handset to another, say due to a dead battery or simply upgrading your handset to another model, then all you have to do is transfer the SIM card to the new phone and power it on. The SIM card will automatically connect to the same network and all your phone contacts will still be available. For international travelers, all they have to do is carry their GSM phone handsets to a new country and purchase a new SIM card and airtime in the other country. This is usually far cheaper than using your own SIM card in a foreign country.
SIM cards are usually protected by an embedded 4-to-8 digit PIN (Personal Identity Number) code, which one usually must to enter when the phone is starting up, although this can be disabled on the phone. You can, and should, change the PIN to a number different from the original one that shipped with the SIM card, which is typically a widely-known and easy to guess default such as 0000 or 1234.