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Wire strippers are small, hand-held devices of varying complexity used to safely peel the insulation off the end of a piece of wire, exposing a length of bare conductor for making electrical connections.
Wire can be stripped with a knife, but this is generally not a good idea. When peeling back the insulation with a knife, there is a risk of nicking the conductor underneath. This can weaken it substantially even with a small nick, making it more likely to break when bent. The problem is worse with stranded wire: nicking can break off some of the strands, which has the effect of reducing the diameter of the wire, which reduces the current carrying capacity of the wire and can lead to overheating and breakdown of the remaining insulation. Some people have fingernails strong enough to strip wire, and this is much safer than using a knife because a fingernail will not nick the conductor underneath.
I have seen three kinds of wire strippers. The first, most common, and more simple somewhat resembles a pair of Needle nose pliers with a series of various sized half-holes (sharpened on the inside) cut into the jaws that match up with each other when the jaws are closed. To strip wire, select the hole which corresponds to the wire gauge and close it around the insulation, being careful not to pinch the conductor underneath. If stripping stranded wire, use the next gauge up to avoid damage to the strands. With the wire stripper tightly closed, give it a bend or twist to cut all the way around the insulation and pull it off the end of the wire. It takes practice to get this down to a smooth motion. This kind of wire stripper often also has wire crimpers built in.
The problem with the first kind is that it has a limited number of wire gauges which it can strip, typically around six or so. A set of them is required for dealing with a variety of wires - including AWG and metric, or very small and very large - although a pair that will strip a range from 10-18 AWG (6-0.75mm2) will be sufficient for most purposes.
The second kind of wire stripper solves this problem by being infinitely adjustable. This kind has only one diamond-shaped hole in the jaws, and an adjustable arm of some sort that can be set to stop the jaws closing at any arbitrary size. This kind can be used to strip any wire from some maximum size down, whether AWG or metric, but must be adjusted for each new size. This kind is not very popular.
The third kind of wire stripper, called an automatic wire stripper, has a mechanical linkage powered by a spring which can grab, cut, and pull the insulation automatically as the handles are pulled closed. Some models also have an adjustable "wire stop" to ensure that each wire is stripped to the same length of bare conductor. The price for this convenience is additional weight and more force to close the jaws when overcoming the spring tension. Like the first kind, this model can only be used on a specific set of wire sizes due to the pre-drilled holes used for stripping. While popular with DIY and home repair users who don't strip wire often, this model is not popular with professional electricians, who usually use the first kind.
Special models also exist for stripping telephone wire, cat-5 cable, ribbon cable, coaxial cable, and other special use bundles of wires.
miss julie tells me that hot wire strippers use two filaments to melt the wire insulation rather than blades to cut it. These are used when it is critical not to damage stranded wires (such as in high voltage applications).
Anark adds that, lacking proper tools, diagonal pliers work better than a knife to strip wire. But again, one must be careful not to nick the conductor.
smartalix says Lasers are increasingly being used in manufacturing for wire de-lamination. Just goes to show, lasers make everything cooler. | 
