Arithmetic Coding is a form of data compression that encodes a sequence of symbols into a single number between 0 and 1. It works by dividing the range of possible values based on the probabilities of each symbol in the sequence. As each symbol is processed, the range is narrowed down, allowing for efficient representation of the entire message. This method is particularly effective for compressing data with varying symbol frequencies, as it can achieve better compression ratios than traditional methods like Huffman Coding. By using fractional values, Arithmetic Coding can represent long sequences of symbols with fewer bits, making it valuable in applications like file compression and multimedia encoding.