Where and how are my passwords stored? Are they encrypted?
All passwords are stored encrypted. By default, the encryption is not strong however, and a determined user could potentially decipher the encrypted password. Remember that if a person can read your files or registry, then they have access to your entire machine anyway.
You can optionally use much stronger (AES 256-bit) encryption. To do this, go to Encryption page from: burger menu > Global Settings in V9 (or newer) version (or select Preferences > Options from the main menu in V8 (or older) version). See the help file for details and warnings.