activate transcoding in vlc

I am trying to download a stream using vlc media plaer. I did google that up, but I could not exactly decide how activating transcoding helps. I am guessing it is better for the quality? But when I activate it, I see squares on videos. The computer has i7 and dedicated graphics card.

Could someone here shed a light on this?

Edit: I want to also ask whether vlc resumes download if there's a buffering problem in middle?