Firstly: 

This sacrifice which is done for the newborn is called ‘aqeeqah. The scholars differed concerning the ruling on ‘aqeeqah; some of them said that it is obligatory and others said that 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 

Thirdly: 

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). 

And Allaah knows best.