Select the "Select Inverse" option, and you will see that the "marching ants" line now goes around the outer edges of the image. This shows you that it is the area between the inner line and the outer edge that is now selected. Any changes that you make will now take place within this area, leaving the inner section untouched.
If you right click and choose "Select Inverse" again the outer edge line of "marching ants" will no longer be there, showing you that just the inner area is selcted, and any changes you make will only take place inside this area.
You could use this tool for, for example, creating a vignette effect around the image.
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