When used in the web hosting industry it means literally to oversell. Let’s say you have a simple dedicated server with 4 GB of RAM (memory) and a 100 GB hard drive. Your web hosting provider can be nice and just put 4 powerful shared hosting accounts on this server. Each shared hosting account could get 1 GB of RAM and 25 GB of hard drive space.
When your web host begins overselling they take that 4 GB of RAM or 100 GB of disk space and sell it to a lot more people. Instead of just selling a different number of web hosting plans that stay within the limit of 4 GB of memory or 100 GB of disk space on the dedicated server. The web hosting provider may decide to sell the same web hosting plan to 50 customers. Now 50 customers may think they each have 1 GB of memory and 10 GB of disk space with their shared hosting plan but in reality it is not physically possible. This is overselling.
The problem arises when a lot of the customers begin to use the resources allocated to their web hosting account. Take for example with a simple dedicated server that has a total capacity of 100 GB of storage space. If your web host were to begin overselling the server. They can put 500 customers each with a 1 GB disk space plan on the server.
Some reseller hosting accounts allow overselling. The good news is most web hosting customers do not use anything near the disk space offered by most web hosts. The memory for shared and reseller accounts vary by the web host. If you start to notice slow performance than your web host maybe overselling the server.