Reducing a liquid means just what it sounds like – making what there is smaller. You do this by simmering or boiling the liquid so that the water evaporates. This concentrates the liquid so it has more flavour. It’s not an exact science, so if a recipe says “reduce by half”, you simply simmer or boil it until you think there is half as much liquid as there was in the beginning.
When making stock, it can be useful to reduce the liquid right down if you’re not going to use it straight away because it saves room in your fridge or freezer. When you want to use the stock you can then add water to bring it up to its former concentration. For example, if you’ve made 500ml of nice stock and then reduced it by half so that it’s 250ml, when you want to use it you add 250ml of water to restore it to the right concentration.