Lithium has been used for over half a century for the treatment of bipolar disorder as the archetypal mood stabilizer, and has a wealth of empirical evidence supporting its efficacy in this role. Despite this, the specific mechanisms by which lithium exerts its mood-stabilizing effects are not well understood. Given the inherently complex nature of the pathophysiology of bipolar disorder, this paper aims to capture what is known about the actions of lithium ranging from macroscopic changes in mood, cognition and brain structure, to its effects at the microscopic level on neurotransmission and intracellular and molecular pathways. A comprehensive literature search of databases including MEDLINE, EMBASE and PsycINFO was conducted using relevant keywords and the findings from the literature were then reviewed and synthesized. Numerous studies report that lithium is effective in the treatment of acute mania and for the long-term maintenance of mood and prophylaxis; in comparison, evidence for its efficacy in depression is modest. However, lithium possesses unique anti-suicidal properties that set it apart from other agents. With respect to cognition, studies suggest that lithium may reduce cognitive decline in patients; however, these findings require further investigation using both neuropsychological and functional neuroimaging probes. Interestingly, lithium appears to preserve or increase the volume of brain structures involved in emotional regulation such as the prefrontal cortex, hippocampus and amygdala, possibly reflecting its neuroprotective effects. At a neuronal level, lithium reduces excitatory (dopamine and glutamate) but increases inhibitory (GABA) neurotransmission; however, these broad effects are underpinned by complex neurotransmitter systems that strive to achieve homeostasis by way of compensatory changes. For example, at an intracellular and molecular level, lithium targets second-messenger systems that further modulate neurotransmission. For instance, the effects of lithium on the adenyl cyclase and phospho-inositide pathways, as well as protein kinase C, may serve to dampen excessive excitatory neurotransmission. In addition to these many putative mechanisms, it has also been proposed that the neuroprotective effects of lithium are key to its therapeutic actions. In this regard, lithium has been shown to reduce the oxidative stress that occurs with multiple episodes of mania and depression. Further, it increases protective proteins such as brain-derived neurotrophic factor and B-cell lymphoma 2, and reduces apoptotic processes through inhibition of glycogen synthase kinase 3 and autophagy. Overall, it is clear that the processes which underpin the therapeutic actions of lithium are sophisticated and most likely inter-related.