Enhancing an item is simply upgrading it by adding extra attribute. You can enchant weapons to increase damage, armors and shields to increase maximum health and accessories to increase stats.
An enchant stone is required for enchanting. There are 4 levels of enchant stones and each tier is used for 3 enchantment levels. So 4 x 3, your items can be upgraded to +12 enchantment level. Enchant stones can be crafted or found in loot chests.
How to enchant?
To enhance an item, you need enhancement stones, and a piece of equipment that you wish to enhance. This must be either a weapon, a shield, or a piece of armor. To enhance something you must go to a weapon or armor smith.