I have had a couple of problems with buying stuff off E-bay. The first thing was some gift vouchers which never arrived. I actually paid by cheque on this occasion - £70 for £100 worth of vouchers which never arrived - he was just a rip-off merchant. I claimed through e-bay but after they took off the P&P and their £15 admin fee, I only got around £45 back and it took MONTHS.
On two other occasions, when I had paid via Paypal and the goods never arrived, for one item, which had actually gone missing in the post, the man then sent me a replacement after Paypal intervened and the other item, Paypal found in my favour but couldn't give me all the money back as there was not enough in the man's Paypal account.
If Paypal find in your favour, they will only give you the money back if the person has it in their account, they will not take legal action to recover your loss.
In the case of the gift vouchers, I was going to report it to the police but my friend, who is a Detective Sergeant, told me that, although the case would be investigated, the police would not get my money back. I would have to take him to a small claims court and I would then, obviously, only get my money back if I won the case. As the seller was at the other end of the country and I had some of my money back, I decided it wasn't worth the effort.
Just to follow on from what Sarah c said, a certificate of posting can be obtained which is free of charge and covers the item for loss or damage up to a value of 100 x standard class first post. i.e. when a first class stamp was 30p, a certificate covered for up to £30. It proves that the item was posted and offers some insurance too and, as I said, you don't have to pay for it !