After you turn it on, it will ask you for the password you want to use, and will ask you for a password hint. Did it do that? If it didn't, then you didn't set it properly. Whenever it goes into sleep mode (or you turn the Kindle off), it will ask for the password when you try to turn it back on.
Keep in mind that any one can do a search and discover all you have to do to get past the password protection is type resetmykindle. When this is done the kindle is set back to factory and all the books are removed.
Pamela: If you contact Amazon as soon as a kindle is lost/stolen, they can brick it remotely so that it cannot be re-registered to an amazon account unless you call back and tell them you found it. you will still need to deregister it yourself, but that will prevent them from being able to use any amazon account with it.
There isn't anything that keeps them from doing anything on a stolen kindle. Deregistering it just keeps them from buying from amazon, but that isn't necessary either. Password protecting just causes them to lose your books when they undo it, but they can still get books from other places when you deregister it. Of my 800 books, only 100 came from amazon and they were all freebies.
The real issue in password protection is for those who put confidential personal and business documents on a Kindle. If they lose the Kindle and it doesn't have a password, that's a serious issue.
I don't see any reason to password protect so that you *protect* your book purchases. Amazon has those backed up and nothing is lost except the hardware. A password isn't going to keep the hardware from being lost or stolen.
And Amazon has been good about refunding any unauthorized purchases on your card if you de-register and notify them in a reasonable amount of time. So in truth, your credit card isn't at that much risk either unless you don't notice that your Kindle is missing.