It means to run it at a faster speed than the factory set it to function at. For example my i7 920 CPU is rated to run at 2.66Ghz but I run it at 3.6Ghz.
It's something that requires some background knowledge or you could easily damage hardware.
Often times depending on what a user's goals are it also means obtaining better hardware especially cooling items as overclocking creates more heat.
When CPU's are manufactured they go through vigorous testing by the factory and they must pass certain criteria and then get sorted and rated according to how they did in those tests.
The ones that do really well will be rated much higher and also be much more expensive to purchase.
What does happen though is some pieces that get rated lower are often capable of functioning well at higher speeds and these are the ones that hard core users like because they are far less expensive to purchase yet can often be tweaked to run right along with the more expensive items.
Essentially you can upgrade it using system settings to run as if you put more money into buying it, however it also shortens the life of the CPU. As long as you don't overdo your overclocking, it will still last a good while, regardless of overclocking.