What exactly is overclocking?

Overclocking is the act of changing the clock speeds or frequencies of a certain component in a computer. It is usually done in the BIOS for CPUs/Memory, or using a specialized tool in Windows for video cards (such as MSI After Burner). Overclocking a component increases its speed, but if it is not done correctly, can make the computer run unstable, or can even damage components. Temperatures are the main thing to look out for while overclocking. If you do not have adequate cooling, the components will at some point overheat, which can cause failure. You also have to keep the voltages in check. Overclocking a component too far with stock voltage can cause instabilities. If the BIOS lets you, voltages can be changed for the CPU and other hardware. Increasing the voltages of a component will increase its heat output significantly.

Long story short, don't overclock if you are not comfortable doing so. Because doing something wrong can turn out to be very bad. Including giving a component far too much voltage, and literally frying said component.

Some manufactures have more lenient restrictions on their warranties when it comes to overclocking. Read your warranty well.

In the last 2 years overclocking has become increasingly mainstream. With the advent of K series unlocked multipliers it's a given, and mobo manufacturers all have advanced o.c. settings on even their low end Z68 & Z77 boards. It's a way to stretch a dollar and increase performance at the same time. I paid $199 for my i5-3570K, and oc'd to 4.3 GHz it performs very much like an i7-3770K at stock speeds, which costs $330. To do this and still run nice and cool I had to buy a Corsair H100, but I would've gotten one anyway. Like Cliff says, even with the best cooler in the world, one day it'll quit and try it's best to cook your system, so temps must be perpetually monitored. No problem for me, though, I'd monitor them even without the overclock.