Not sure which part you're confused about, but I'll try to break it down.
When sanding wood (or metal, for that matter), you'll sand with sandpaper starting with coarser grits and progressing to finer grits. Sandpaper will be marked as 100, 220, 320, 400, 600, 800 grit, etc. Coarser grit will have the lower number, finer grit the higher number. Steel wool also comes in different grades, but the labels are different: 0, 00, 0000, etc., where 0 is coarse and 0000 is very fine.
Once you sand the wood to a fine finish, say with 400 or 600 grit sandpaper, you can switch to 0000 steel wool for the sanding. You'll start to see the wood take on a little bit of a sheen, almost a satin finish. Then, switch to hand rubbing the wood with the coarse cloth, and polish the wood dry with some pressure from your hand. You should feel the wood start to get warm from the friction. It doesn't have to get warm (the heat has no effect), but it's the process that gives the wood a good finish.
At that point you can apply your finish--either a stain followed by a finishing coat (a hardening oil such as boiled linseed oil or tung oil, or else a synthetic like polyurethane) or just a finishing coat. The key to getting a shiny or glossy finish is to apply the finishing coat in thin layers. Personally I like to use Birchwood Casey Tru-Oil. It's a tung oil with additives that speed the drying process. I like to apply a little bit of the Tru-oil, then rub it into the wood with 0000 steel wool. By rubbing the oil in with the steel wool you effectively wet sand the wood, mixing wood dust with the oil and forcing it into the natural pores of the wood. This is usually called "filling the grain." I then wipe down any excess oil and allow the piece to dry for a day or 2. Linseed oil could take a week or more to dry depending on how thick it's applied, the humidity in your area, and how oily your wood is (for example, many tropical hardwoods have natural oils that resist penetration by linseed or tung oils).
After the first coat of oil has dried, I sand the surface lightly with 0000 steel wool, wipe off any dust, then apply the next coat of oil with a cotton rag (no steel wool). I apply a thin coat so that there are no runs, and I wipe off any excess. Again, I allow it to dry for a day or so. Repeat this process--apply a thin coat, dry, sand with 0000 steel wool, repeat--until you get the gloss to where you want it. I've done a number of gunstocks over the years with good results. For older Winchester or Marlin lever actions where I want to get a satin hand-rubbed look, I might apply 5-7 coats. On stocks where I want a high gloss that rivals a high end shotgun I've applied as many at 20. The more coats, the higher the gloss.
Once you apply the last layer of oil and allow it to dry thoroughly (I give the last coat at least 2 weeks to dry), then I apply a wax finish.