How does Bitcoin work?

When a Bitcoin user makes a purchase, the payment triggers a broadcast of the financial transaction to the Bitcoin network. The Bitcoin transaction is a digitally signed message transferring the ownership of bitcoins from one “Bitcoin address” to another. For the transaction to take effect it must be recorded in a public ledger or public transaction database called the block chain. Approximately every ten minutes a bundle of transactions, called a “block”, is added to the block chain. The incentive for this accounting process, known as “mining”, carries a reward of 25 bitcoins per block added to the block chain.  This 25 bitcoins reward maintains the integrity of the Bitcoin system by allowing the computers that confirm transactions to also mint new bitcoins in the process.
Bitcoin payment processing fees are optional, and generally substantially lower than those of credit cards or money transfers.

Read now about concepts you must know:

Block chain

Mining

Buying and selling bitcoins

Wallets