When a folder is locally secured
Making the contents of a drive secure or encrypted is only available in NTFS (New Technology File System) file system.
You can not enable file encryption in an FAT32 file system.
In Windows, even if the system drive is using the NTFS file system, its contents are not automatically secured or encrypted. But some of the files, but not all, are automatically compressed to save disk space and this is common to Windows XP and other Windows platforms that use NTFS as their file system.
Compressed files are easily distinguishable because its texts are highlighted with blue color.
If you want to encrypt a file or a folder, you can do this by right-clicking on the file or folder and selecting Properties then Advanced.
Check the option Encrypt contents to secure data, click OK then hit Apply. You will then be asked if you want to apply the changes to the current folder only or to all of its contents including the subfolders and files inside. If you choose Apply changes to this folder only, only the current folder will be encrypted.
The subfolders and files inside are not encrypted. But if you selected Apply changes to this folder, subfolders and files, the folder including its subfolders and files inside will be encrypted.