Overclocking allows you to increase the clock rate of your CPU. For example, when you buy something like an Intel Core 2 Duo E6600, it's clocked at 2.4GHz. Overclocking would be raising that to 3GHz, which is effectively a 25% performance gain.
You overclock by finding a guide relevant to your CPU and following it. With a good motherboard a lot of the work is done for you (ASUS ones are good for this), and will advise with red text and whatnot in the BIOS if it thinks what you're doing is going too far. Here (
http://www.tomshardware.com/forum/240001-29-howto-overclock-quads-duals-guide) is a good guide for overclocking Intel Core 2 Duo/Quad CPUs, especially if you have an Asus (P5B-Deluxe) motherboard. :) More can be found via Google ('overclock q6600 guide', etc)
When overclocking you must avoid feeding too much voltage into the CPU. While modern CPUs are designed to shut themselves down when they get too hot and are overclocked too far, sometimes you must adjust the voltage as the clock you're going for needs more power; it's almost always only a minimal raise needed, and going too far can overload it with electricity before it has chance to shut itself down. This is pretty much the only way to cause irreparable damage.
If overclocking is done improperly you end up with an unusable, non-returnable CPU.
Overclocking is best done when you feel that your processor is reaching the end of its life, and things are noticably slower than you desire. The most risk-free time to do it is once your processor is considered old, and thus there's little value to be gained from selling or keeping it. However, many enthusiasts do it on newer processors as there is performance from models that cost Ј200 higher to be had.
If overclocking, it's important to know that while there is risk, if you pay attention to a good guide (especially if it's written for your CPU and motherboard), there's very little room for going wrong. Long guides may look daunting, but in all honesty they are a doddle to follow and I successfully did my first overclock in just 45 minutes a few months ago (although testing obviously took a bit longer).
You may find that the cooler your CPU comes with (the big fan that goes on top of it) isn't very good, and benefit from spending about Ј15 on one that can take the heat away from the processor better. This is much less necessary with Core 2 Duo CPUs than it has been in the past.
One final thing to be aware of is that certain processors have a lot more overclocking capacity than others. More efficient processors tend to run cooler and thus have more overclocking potential before they get too hot,
For the record, I run an Intel Core 2 Quad Q6600 2.4GHz, which after overclocking is now happily running at 3GHz and ripping my applications a new one. :)