How does dilution work?

When something is diluted, it is DISSOLVED in a SOLVENT.  For example, when salt (NaCl) is added to water, it becomes dissolved.  The NaCl dissociates into Na+ and Cl-.  

Look up solvents, solutes, dissociation.

Dilution is simply making a solution less concentrated by adding more solvent. What happens when a solute dissolves is that the solvent molecules break up the solute structure, surround the solute particles, which can be molecules or ions, and stabilize them by disallowing solute particles to interact with each other and homogenize the solution by dispersing the solvated particles. If the solution is saturated it means the maximum amount of solute has dissolved. By adding more solvent, you just increase the number of solvent molecules in the vicinity of the solvated particles, the amount of solute present doesnt change, just its proportion in the solution is lowered. It becomes less concentrated.