The SPDIF output is a digital audio output. It would be used to feed stereo audio to an outboard Digital to Analog converter for better quality than your audio board. It will also feed the Dolby Digital or DTS audio from DVDs or video files to a home theater system to be decoded there. It cannot be used with headphones directly.
As americanau diophile indicated, SPDIF is a digital signal and cannot be use to a regular amplifier without a decoder. The SPDIF cable can carry up to 8 channels depending on the encoded signal.
Some amplified speakers has built-in decoding chips and therefore it can be connected using just one cable (coax or optical). Best uses of SPDIF is when watching movie or listening to music. Some games does not support multichannel through SPDIF therefore you will only get 2 channel signals. New type of coding called Dolby Digital Live may soon change that, as long as the programmers incorporate it on their design.
If you think about it the connection is only a device to transfer the signal from one end to another. You are less likely to lose much of the frequency through SPDIF than analog.
ok cool then I have another question;
My analog port in the computer has a splitter
One cable goes to my regular speakers and the other goes to my stereo system via this cable
As the stereo system has only RCA ports.
My question is, would it be better to connect my stereo system via the SPDIF port instead of splitting the analog one, when of course I want the system and the regular speakers to work together?