When the /etc/profile has been executed, you are then put into your own $HOME directory. Looking back at the passwd file, this location is the second from the last field.
You may regard this as your home, as this is where you keep all your private stuff.
If there is a .profile present the system will source this file. To source means not to create another shell for this process, thus keeping all your existing environments (/etc/profile) intact from any changes the file (.profile) would make otherwise. When you create another process, your local shell variables, for all intents and purposes, are overwritten.
Back to the .profile. Generally when an account is set up, a skeleton profile is always present. One important ...