I am using wordpress for my blog/site. I am using Freshnews theme from woothemes as the theme for the blog.

Here is the link:
demo.woothemes.com/freshnews/

The font is not that good and it is way too small and the spacing is bad (too congested).

How do I change the fonts, size, spacing (line and paragraph) throughout the blog.

I know I would have to change it somewhere in the stylesheet. But where exactly and how?

And what are the ways to get this done?

Should I install a font somewhere?

Should I use webfonts (like google webfonts)?
What is the advantage in using this?

or what are the other ways?

I think you can contact woothemes support team, they can help it.

In the file style.css, on line 322, at least on the demo page, you'll find this:

.entry, .entry p  { font:14px/1.5em sans-serif; }

You won't have to install any new font (unless you want to of course), browsers already support lots of different fonts. You could i.e. just remove the sans-serif font and let the browser fall back to it's default.


Edit:
Also, on line 75 in the same file, you'll find this:

body {background:#e4e2db;color:#555;font:12px sans-Serif;}

The .entry class sets the font for the entry texts, the body sets the font for the entire document, so you'll want to change that too.