What is web.xml file and what are all things can I do with it?

The web.xml Deployment Descriptor Elements in Oracle's BEA WebLogic Server 8.1 Documentation pretty much sums up each element in a web.xml file. But I am also curious about points below:

1. Is there any configuration parameter which should be avoided like plague?
2. Any parameters related to performance or memory usage?
3. Security related risk due to common mis-configuration?

What else should I know about web.xml apart from element names and their usage?

What is web.xml file and what all things can I do with it ?

The /WEB-INF/web.xml file is the Web Application Deployment Descriptor of your application. This file is an XML document that defines everything about your application that a server needs to know (except the context path, which is assigned by the Application Deployer and Administrator when the application is deployed): servlets and other components like filters or listeners, initialization parameters, container-managed security constraints, resources, welcome pages, etc.

Note that reference you mentioned is pretty old (Java EE 1.4), there have been few changes in Java EE 5 and even more in Java EE 6 (which makes the web.xml "optional" and introduces Web Fragments).

Is there any configuration parameter which should be avoided like plague?

No.

Any parameters related to performance or memory usage?

No, such things are not configured at the application level but at the container level.

Security related risk due to common mis-configuration ?

Well, if you want to use container-managed security constraints and fail at configuring them properly, resources won't obviously be properly protected. Apart from that, the biggest security risks come from the code you'll deploy IMO.

What all should I know about web.xml apart from element name and their usage ?

The SINGLE most important JSP configuration parameter of ALL TIME is in your web.xml. Ladies and gentlemen, I give you... the TRIM-DIRECTIVE-WHITESPACES option!

<jsp-config>
    <jsp-property-group>
        <url-pattern>*.jsp</url-pattern>
        <trim-directive-whitespaces>true</trim-directive-whitespaces>
    </jsp-property-group>
</jsp-config>

This removes all the hundreds or thousands of lines of white space that you'll get in your generated HTML if you use any tag libraries (loops are particularly ugly & wasteful).

The other big one is the default web page (the page you get automatically sent to when you don't enter a web page in the URL):

<welcome-file-list>
    <welcome-file>index.jsp</welcome-file>
</welcome-file-list>    

1. No, there isn't anything that should be avoided
2. The parameters related to performance are not in web.xml they are in the servlet container configuration files (server.xml on tomcat)

3. No. But the default servlet (mapped in a web.xml at a common location in your servlet container) should preferably disable file listings (so that users don't see the contents of your web folders):

   listings true