The password field creates a password text box to store data in. The information typed into the field is not shown to the user.
Caution: The value of this field is stored in plain text. You may find this field useful to store any data you want to handle yourself, in a different system. Obviously, you'd want to encrypt the data when you store it on your end.
The password field type is not the same as the login password field that comes with Shopify by default. That field's data is stored encrypted in Shopify.