An engine thermostat consists of several springs, a seal, a charge cylinder (full of wax) and several valves; sometimes an air bleed is also fitted. The thermostat is actuated due to the varying temperature of the cooling water system. The thermostat's purpose is to warm the engine quickly (by by-passing the radiator), maintain the engine at an optimum operating temperature and ensure overheating does not occur.
When the cooling water (also called 'jacket water') is cold, a valve will by-pass the radiator and thus the temperature of the cooling water will gradually increase (providing the engine is still running). As the temperature increases, wax within the charge cylinder will melt, expand and push a rod further out of the charge cylinder. The expansion causes the radiator by-pass valve to close and the valve discharging to the radiator to open. Essentially the system is a feedback loop, where the cooling water temperature dictates how much the thermostat is open or closed. It is important to remember that a thermostat is two valves, a radiator by-pass valve and a discharge to radiator main valve.
A faulty/sticky thermostat will cause the engine to run either too hot, or too cold. The main reason for this is because the thermostat will become stuck in a certain position, usually fully open or fully closed (meaning the radiator is fully by-passed or all fluid is discharged to the radiator). A failure of one of the springs often causes the thermostat to operate incorrectly.