It is hard to explain in simple words, but I'll try.
If you enter a password in any program or website for the first time it has to be stored/saved somewhere. This is usually done with an encrypted version of the password. A simple form of encryption would be to change all characters to the next one in the alphabet so "hello" would become "ifmmp" (h=i, e=f, l=m, o=p). MD5 is a different, much more complex form of encryption, but that should not bother us now.
Once you have to enter your password for the second time the following happens:
a) you enter "hello"
b) it gets encrypted to "ifmmp", by the formula above
c) it is compared to the stored encrypted version of the password, which is again "ifmmp" (see above)
You may find that complicated. Why is the password encrypted before the storage and comparison? The reason is security. In complex encryption formulas it is not possible to reverse the encryption. That means you can't derive the unencrypted "hello" from the encrypted "ifmmp", like you could above. Hard to imagine? - Just trust me!
