A stencil is the thing that is used to make small markings on a surface. Some of us old timers remember using them in school when they showed us how to make proper shaped letters :-)
It was usually a cardboard sheet with the letters or parts of letters cut out. You held it against the surface, and used a paint brush through the openings. Imagine a sheet of cardboard with a simple rectangle punched out of it. If you held it up against the surface with the rectangle vertical, and swiped a paint brush across the rectangle you made a simple capitol I. Now, that was the few letters with one opening (sometimes a lower case t was another). Most letters had several adjacent cutouts. That meant the resulting letters looked a bit funny- they had little light colored lines through them. The font represented by this was called a stencil font. The process of making markings this way was called stenciling. Somehow, the word has now come to also mean the small markings made with stencils.
BTW, for those of you wanting to make decals using these markings, there are stencil fonts available online that can be downloaded and available for your computer. I did not save the location of these, I just found them by google. I think there are several- each branch of service seems to have a slightly different stencil font. I believe the Star Trek font is also available (it is not a stencil font- they have much easier ways to apply markings in that century).