Hookah, which is actually the name of the device used to smoke tobacco out of works like this:

Hookah or water pipes start with a bowl on top which is then filled with flavored tobacco or shisha.  A layer of foil is then placed on top of the bowl containing the tobacco.  Hot coals are then placed on top of the bowl and in turn the coals will heat up the tobacco.  This causes the tobacco in the bowl to begin to smoke.

The process of smoking hookah is similar but different than smoking cigarettes.

The difference is that instead of burning the tobacco you are merely heating it up.  To smoke the hookah you take the hose which is connected to the vase and suck on it.  The act of sucking on the hose lowers the air pressure from the hookahs vase and draws the smoke down from the smoldering tobacco.

The smoke is able to reach the hookah smoker because of the metal stem running through the hookah itself.

The bottom of the stem in the vase is submerged in water so that when you’re sucking the smoke from the bowl it emerges from the stem underwater.  The smoke is then able to emerge from the water rising up to the vases air space.  At the top of the vase there is an opening for the hose which takes the smoke in the air space in the vase and carries it through to the mouth space to the smoker.