Negative Keywords are used in your Pay Per Click account to disqualify certain search phrases from appearing in the results pages (commonly called the SERP or Search Engine Results Page). As you can imagine, the effective use of campaign and ad group negatives is critically important to any pay per click account to save you money and to help filter out unnecessary search traffic.
Negatives can be added in Google Adwords in several places. The Shared Librray on the left of the interface or inside of any of your Ad Groups all the way at the bottom of the Keywords tab. They are added just like any other keyword except that they are an anti-keyword instead. Whenever a user types a search phrase that includes a negative, your ad will not show up in the SERP.
Some examples of negative usage might be:
You sell doors but don't want someone coming to your site looking for info on The Doors (the band), you might add the negatives 'album', 'record', 'band', 'LA Woman', 'Morrison', 'history', etc. into your Ad Group Negatives.
You are a consultant in New Jersey but do not work in New York, you might add the negatives 'york', 'manhattan', 'long island', 'brooklyn', etc.
Campaign negatives affect all Ad Groups in your campaign while Group level negatives only affect keywords within that group. This is very useful if you sell products from several manufacturers. If you sell KitchenAid mixers but do not carry any of the other KitchenAid line of products, you may want to add KitchenAid to all of your Ad Groups except the Mixers group.
Combine negative keywords with other positive matching options like Phrase Match (keywords surrounded by quotes) and modified broad match (the plus sign on a keyword) and you'll watch your conversions rise and costs decrease.
Examples of this might be:
Your company sells books but only to other businesses, not to the general public. You'll want to add negatives for 'residential', 'home', 'house'. Once your negatives are in place, you can edit your entire keyword list and add requirements using the plus sign. The keyword books will cost you a fortune in bad clicks but change your keyword to +books +wholesale, +books +distributor, +books +distributors (modified matches do NOT automatically add plurals, misspellings or other suggestions), +book +distributor, +book +b2b, etc.
You can see how your keyword list would grow very quickly but if your Campaigns and Ad Groups are set up in an easy to understand way, that is not a problem at all. It is not uncommon for us to set up a campaign for even a small client with several thousand keywords and then parse them down over time.
So how do you pick the best negative keywords? Well it's impossible to know what all users all across the world are going to type into a search engine like Google. The trick is to add as many as you can and then use the power of the Google Analytics report called Matched Search Queries. Google rearranges their interface fairly often but at the time of this writing you can get to it under Traffic Sources, Advertising, AdWords, Matched Search Queries. Go ahead and create a shortcut to that, it may be the most important report you'll see. The report will show you what a user actually typed into Google and what Ad Group and Campaign you were matched against.
If you want a perfect Adwords account, the key is constant monitoring of Matched Search Queries and tweaking of your campaign negative and match types based on the information you collect from that report. Depending on your traffic, this should be a daily project for your SEO/SEM Manager.