Collisions are when two instances collide (actually their mask or bounding box). When these collisions happen, you can execute code.
Here are some examples of things you want to happen when a Collision Event takes place:
Destroy an object, for example a projectile
Draw a graphical effect, like an explosion
Play a sound effect
Change the value of the score, health, or lives – either up or down
Set instance to move or stop moving
Create a new instance of an object
Execute a script
Go to a different room
Make the object follow a path
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