How does insertion sort work and when is it efficient?

Insertion sort builds the sorted array one element at a time by inserting each element into its correct position among previously sorted elements. Time complexity is O(n^2) worst/average case but O(n) for nearly sorted arrays. Space is O(1). Efficient for small datasets, nearly sorted arrays, and online algorithms (can sort as data arrives). Used as base case in hybrid sorts like Timsort.