Praise be to Allaah.  

Firstly:

Aqeeqah refers to the sacrifice which is done for the newborn baby. Musim scholars have differed concerning the ruling on ‘aqeeqah; some of them say that it is obligatory (Fardh) and others say it is Sunnah mu’akkadah (a confirmed Sunnah).

The scholars of the Standing Committee said:
‘Aqeeqah is Sunnah mu’akkadah. For a boy two sheep should be sacrificed, each of which should meet the same conditions as a sheep for udhiya (sacrifice), and for a girl one sheep should be sacrificed. The sheep should be slaughtered on the seventh day, but if there is a delay it may be slaughtered at any time, and there is no sin in delaying it, although it is preferable to do it as soon as possible. And Allaah is the Source of strength; may Allaah send blessings and peace upon our Prophet Muhammad and upon his family and companions.

There is an odd and weak (da’eef) opinion which says that ‘aqeeqah is makrooh.
Ibn al-Qayyim said:
Imam Ahmad said, according to a report narrated by Hanbal: “It was narrated that some people said that ‘aqeeqah is makrooh because it is something that belongs to the Jaahiliyyah. He said, this is because of their lack of knowledge and the fact that they are not aware of the reports. The Prophet (peace and blessings of Allaah be upon him) did ‘aqeeqah for al-Hasan and al-Husayn, and his companions also did it. These people say that it is something that belongs to the Jaahiliyyah, but it is the Sunnah of the Messenger of Allaah (peace and blessings of Allaah be upon him), who said:
‘Every child is in pledge for his ‘aqeeqah’. This hadeeth has a jayyid isnaad and was narrated by Abu Hurayrah from the Prophet (peace and blessings of Allaah be upon him).” According to a report narrated by al-Athram, he said: “Concerning the ‘aqeeqah there are ahaadeeth with isnaads from the Prophet (peace and blessings of Allaah be upon him) and from his companions and the Taabi’een, but these people say that it is an act of Jaahiliyyah.” And he smiled like one who is surprised.

Tuhfat al-Mawdood, p. 45, 46
Secondly:
With regard to the purpose of the ‘aqeeqah, it was mentioned in a hadeeth of the Prophet (peace and blessings of Allaah be upon him):  “Every child is in pledge for his ‘aqeeqah.” The scholars differed as to the meaning of this hadeeth. It was said that the meaning is that if the ‘aqeeqah is not done for him and he dies in childhood, he will be prevented from interceding for his parents; or that the ‘aqeeqah is a means of ridding the child of the Shaytaan and protecting him from him. The child may miss out on something good if his parents neglect to do the ‘aqeeqah even though that is not his action, just as when the parents have intercourse, if the father says ‘Bismillaah” the Shaytaan will not harm his child, and if he fails to do so the child will not have this protection.
See Zaad al-Ma’aad, 2/325; al-Sharh al-Mumti’, 7/535

How is Aqeeqah Done?
With regard to how it is to be done, the Prophet (peace and blessings of Allaah be upon him) explained that, as may be seen in the following ahaadeeth:
1– It was narrated from Salmaan ibn ‘Aamir al-Dabbi that the Prophet (peace and blessings of Allaah be upon him) said:
     I heard the Messenger of Allaah (peace and blessings of Allaah be upon him) say: “ ‘Aqeeqah is to be              offered for a (newly born) boy, so slaughter (an animal) for him, and remove all dirt from him.”
    (Narrated by al-Bukhaari, 5154)
2 – It was narrated from ‘Aaishah (may Allaah be pleased with her) that the Messenger of Allaah (peace and blessings of      Allaah be upon him) commanded them to sacrifice two similar sheep for a boy and one for a girl.
     Narrated by al-Tirmidhi; he said, it is hasan saheeh; Ibn Maajah, 3163; Saheeh al-Tirmidhi, 1221.
3 – It was narrated from Umm Karaz that she asked the Messenger of Allaah (peace and blessings of Allaah be upon           him) about ‘aqeeqah and he said: “For a boy two sheep and for a girl one, and it does not matter whether           they are male or female.”
      Narrated by al-Tirmidhi, 1516; he said, it is hasan saheeh; al-Nasaa’i, 4217; Abu Dawood, 2835; Ibn Maajah, 3162,           without the last part; Saheeh Abi Dawood, 2460.
4 – It was narrated from Samurah ibn Jundub that the Prophet (peace and blessings of Allaah be upon him) said: “Every      child is in pledge for his ‘aqeeqah, which should be sacrificed for him on the seventh day and his head should be      shaved and he should be given a name.”
     Narrated by al-Tirmidhi, 1522, he said it is hasan saheeh; Ibn Maajah, 3165; Saheeh Ibn Maajah, 2563).
     The hair on the head of the new-born must be shaved on the seventh day. Shaving the hair of the head of the child          provides the child with strength and opens up the pores of the skin. It is also beneficial to the eye-sight, the hearing          and the sense of smell.
 
It is mustahib (desirable) to give silver (or money if silver is not available) in sadaqah to the poor and needy equal to the weight of his or her hair. Sayyidah Fatimah  (Radhiallaho Anha)  distributed silver as sadaqah equal in weight to the hair on the heads of Sayyidna Hasan Husain Zainab, and umme Kulthum. (Malik in Muwatta and Yahya bin Bukair) on the birth of Sayyidna Hasan, the Noble Prophet,(Sallallaho alaihe Wasallam) asked Sayyidah Fatimah (Radhiallaho Anha)  to have his hair shaved off and offer silver equal in weight to the hair as sadaqah. The hair weighed a dirham or a little lesser than a dirham. (ibn Ishaq).

The entire head must be shaved, to shave some hair and to leave some on the head is called qaz' and is disallowed.(Bukhari and Muslim)  This is not fair with the head because some of it is bared and the rest hidden. It is exactly as though a part of the body receives sunlight and rest of it is in shade.  Also, it may be compared with a shoe on one foot and none on the other.  Both these things are forbidden. The intention is to prevent the defacing of one's appearance.  It also aims at discouraging the adoption of unreasonable pretense or resemblance to non-Muslims. You must act on these mustahib deeds so that it is then easy to act on the fardh (compulsory deeds).

And Allaah knows best.