Yes ZIP files are intended to be compressed and therefore smaller than the original files. Yes this is a lossless process in that when you expand the ZIP file it restores copies of the original files which will be exactly the same quality/size as the original files.
There are lots of different compression algorithms, even ZIP can use multiple different ones. These will work in different ways and might be either able to compress certain types of files better than others, or be faster. Some other software will use other quite different algorithms e.g. JPEG photo image compression which is lossy.
As a very simplistic example of how lossless compression can work lets assume a hypothetical text file containing a line of text as follows.
AAAAAAAAAAAAAAAAAAA
This as normal uncompressed would take 20 bytes of space at least. However a very simple (and not real) method of compression might be to store this as
20xA
As you can see this is much shorter and would only take four bytes. It should be obvious how this would be 'decompressed' back to AAAAAAAAAAAAAAAAAAA
So there are lots of different techniques/algorithms which can be used to do lossless compression like this. As mentioned some methods are more suited to certain types of files.
It should be noted that these days many files types have their own built-in file compression schemes, e.g JPEG, PDF and even .docx so this can mean that these types of files might not compress by any noticeable amount when you try to compress them again with ZIP. (This is very common with PDF files.)