/etc/passwd file stores essential information, which is required during login i.e. user account information.
/etc/passwd is a text file, that contains a list of the system's accounts, giving for each account some useful information like user ID, group ID, home directory, shell, etc. It should have general read permission as many utilities, like ls use it to map user IDs to user names, but write access only for the superuser (root)
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The /etc/passwd contains one entry per line for each user (or user account) of the system. All fields are separated by a colon (:) symbol. Total seven fields as follows.
Generally, passwd file entry looks as follows (click to enlarge image):
/etc/passwd is only used for local users only. To see list of all users, enter:$ cat /etc/passwd
To search for a username called tom, enter:$ grep tom /etc/passwd
The permission on the /etc/passwd file should be read only to users (-rw-r--r--) and the owner must be root:$ ls -l /etc/passwd
Output:
-rw-r--r-- 1 root root 2659 Sep 17 01:46 /etc/passwd
Your encrpted password is not stored in /etc/passwd file. It is stored in /etc/shadow file. In the good old days there was no great problem with this general read permission. Everybody could read the encrypted passwords, but the hardware was too slow to crack a well-chosen password, and moreover, the basic assumption used to be that of a friendly user-community.
Almost, all modern Linux / UNIX line operating systems use some sort of the shadow password suite, where /etc/passwd has asterisks (*) instead of encrypted passwords, and the encrypted passwords are in /etc/shadow which is readable by the superuser only.
sourcE: cyberciti.biz - Understanding /etc/passwd File Format