First you want to go to the blacksmith and click on equipment enhancement then equipment evolve

As you can see, it shows me the quality it will change to, the type of stone needed and that it will give me a random stat

click on the item and it will change to show the item has been changed to the next level quality. It now also shows that I need purple  stones

There is different equipment in the game so some can only be upgraded one quality, others can be upgraded more qualities. The better a item, such as set items, can cost more to increase in quality.

The advantage to increasing quality is that it can increase the number of attributes on a item can be increased up to a max of 4 attributes. Attributes can be rerolled at the black smith so the item is more suited to the players combat style