What is the difference between:
- "How it works?"
- "How does it work?"
Your first example, how it works, is a free relative clause which cannot be used as a question. Your second, How does it work?, is an ordinary question.
What I'm going to call an "interrogative phrase" (IP) is a sort of 'variable' which stands for an unknown 'value'. The IP is headed by a word which defines the 'type' of value for which it stands: who, what, which define the type as nominal, how, where, why define the type as adverbial, and the construction what ... do defines the type as a verbal. The IP may also be followed by additional terms which further restrict the type—how many or what sort of machine.
Two sorts of clause employ IPs: questions and free relative clauses. In both types of clause the IP represents a constituent of an ordinary declarative clause, 'moved' to the beginning of the clause from the place where the constituent would normally stand:
But the two sorts of clause play very different roles, and have different syntactic structures:
A question asks the hearer to supply the value for the variable named by the IP and defined by the remainder of the clause. A question is an independent clause—it can stand on its own.
The first syntactic rule is that first constituent1 after the IP must be a tensed verb. If the IP stands for the subject of the clause, nothing has to move, because the IP and the verb are already in these positions:
But if the IP stands for some other constituent, the tensed verb must fall before the Subject, and a second rule comes into play: the tensed verb must be an Auxiliary. (Grammarians call this subject-auxiliary inversion.) If the 'canonical' statement version of the clause does not have an Auxiliary verb, the appropriate form of DO is pressed into service. (Grammarians call this DO-support)
Thus the proper form for a question using how is this, with both subject-auxiliary inversion and DO-support:
1Note that an adjunct—a non-essential syntactic component—is allowed to fall between the IP and the tensed verb: Who recently wrote an app?
A free relative clause does not ask for the value of the IP but designates it—hearers may fill it in from their knowledge, but the actual value is not required.
A free relative clause does not call for either inversion or DO-support, regardless of which constituent the IP stands for. After the IP at the beginning, the ‘natural’ order of a declarative sentence is maintained, Subject-Verb-Objects/Complements; the only thing that signals that this is not an ordinary declarative sentence is that something is missing where a constituent was 'replaced' by the IP and 'moved' to the front.
A free relative clause is always a dependent clause—it is embedded inside a 'head' clause and acts as a noun phrase. In these three examples, the head clause is in ordinary black type; the free relative acts as Direct Object, as Subject, and as the Object of the preposition about.
(Since DO-support is not in play here the tensed verbs are not distinguished.) How it works, then, with the subject before the verb, is a free relative clause. Here are some examples of how it might be used:
'How it works' used in an interrogative phrase is something you may not find very commonly spoken amongst native speakers.
Such a sentence construction can be correctly used as an assertive statement (for instance, newspaper headings). Another example is:
Rob knows how it works.
But then again, it may be a part of an interrogative sentence, as in:
Will you tell me how it works?
Here, 'how it works' is correct because it isn't a direct part of the question being asked. The question asked is, "Will you tell me _?" 'How it works' is just that part of the sentence which goes into the blank, as an assertive phrase.
'How does it work' is what you'd say while asking somebody about the way it works. This construction is used in interrogative sentences.
I'll correct Maulik's second answer:
So now you know how it works, don't you?
How does it work? Do you know?
You see that he sets the expressions in context, which is always very important.
If you're using a sentence fragment rather than a sentence proper in your first example (say as a section heading), you'd drop the question mark (and probably the period):
How it works