A hub is a "unintelligent" broadcast device -- any packet entering any port is broadcast out on every port. Hubs do not manage any of the traffic that comes through their ports. Since every packet is constantly being sent out through every port, you end up with packet collisions, which greatly impedes the smooth flow of traffic on your LAN.

A switch, on the other hand, isolates ports -- every received packet is sent out only to the port on which the target may be found (one caveat - if the proper port cannot be determined, then the switch will broadcast the packet to all ports). Essentially, a switch is a router, but one operating at the MAC level rather than the IP level. Since the switch is intelligently sending packets only where they need to go, and not everywhere willy-nilly, the performance speed of your network can be greatly increased.

So do you need a switch or a hub for your SOHO network? If most of your traffic involves one -- or even a few -- ports, then there will be little performance gain achieved by upgrading from a hub to a switch. But if you've got more than a few machines, then a switch can give you a marked improvement in performance.

Further information

Traffic regulators: Network interfaces, hubs, switches, bridges, routers, and firewalls ~ A PDF file that provides an excellent overview of these topics. Highly recommended as a first read. Some of the things covered include: network interfaces, NICs, ports, MAC (media access control) addresses, IP addresses, hubs, bandwidth, collision domains, crossover ports, stackable devices, switches, bridges, routers, firewalls (packet screening, proxies, and stateful inspection).

http://www.linuxgazette.com/issue42/tag/6.html

http://www.sbdsx.com/page23.html