Comparing two versions of writing
Word level is the right level for anything a person reads: an essay draft and its revision, two versions of a clause in a contract, a product description before and after an edit, or the text of two web pages. Comparing by line is too coarse for paragraphs, because a one word change makes the whole paragraph look different. Comparing by character is too fine, because it breaks words into fragments.
In the inline view, deleted words and the words that replaced them sit next to each other, so you read the changes in context. The side by side view shows the original with its removed words marked on one side, and the new text with its added words marked on the other.
What counts as a word
A word is a run of letters, and an apostrophe between letters stays inside it, so don't and it's are one word each. A number with a decimal point or comma between digits, like 3.14 or 1,000, is one piece. Every other punctuation mark is a piece of its own.
Words are counted for the totals, and punctuation is compared but not counted. So changing hello. to hello! shows as a change, and counts as zero words added and zero removed. For languages written without spaces, such as Chinese and Japanese, each character is compared on its own.
What this comparison cannot tell you
It compares the text you give it, and nothing else. It does not understand meaning, so a sentence rewritten with different words shows as removed and added, even if it says the same thing. A paragraph that moved shows as removed in one place and added in another.
It is not a plagiarism checker. It compares two texts you provide, and does not search the web or any database. When you paste from Word or a web page, only the plain text arrives, so formatting, comments and tracked changes are left behind.