Well, I'm not the expert but I would suggest to use md5 on a password. I'm not sure there is a way to prevent sending the password from the form to your code without encryption, since the form needs to be submitted first for you to capture the password.
however, after that, store the password in your database as:
$pwd = md5($pwd);
When you set a cookie, never include the password, or perhaps the md5 password, but this would allow e.g. students on a university to abuse someones account if your cookie is set and it includes login + pwd.
See PHP Builders article on security it's a great one! (click on "columns")
I suggest you only set their login as cookie, and set some session var to tell your program he/she is validated (that's also in the same article on this site).
The only way to be really sure is to have https:// and a hosting company that will allow you to use that?
So, basically, apart from everything your read so far, read this websites columns on security and sessions!