Winds moving in a cloud creates two ions, positive and negative. The positive ions are pushed to the top of the cloud. The negative ions are pushed to the bottom of the cloud. The top of the cloud becomes the anode and the bottom of the cloud becomes the cathode. The air in the middle of the cloud becomes the insulator. The cloud is now a battery or the equivalent of a charged capacitor.

The negative ions on the bottom of the cloud causes the ground and air below to ionize causing them to become positively charged. The positive ions of the ground pull electrons out of the air, forming a positive ion path. The negative ions below the cloud repel electrons in the air and attract the positive ions, leaving behind a pool of electrons, forming a negatively charged path. The ionization occurs like cracks in a wall. The cracks appear as streams which can be seen when your hair stands on end. These ionized paths grow from the bottom of the cloud to the ground and from the ground to the cloud. Since the charge in the cloud is greater than the charge on the ground, the paths from the cloud to the ground grow faster than the paths from the ground to the cloud. The path that ionization takes depends on the strength of the air at any given point and usually results in an ionization path splitting, producing forks . Eventually one or more ionized paths from the cloud will connect with one of the ionized paths from the ground. The first fork to make a connection to the ground discharges, followed by electrons in the next nearest upper fork on the path. This process continues all the way back up to the cloud. Once the final connection is made there is a hugh movement in electrons from the cloud to the ground. The moving electrons rapidly heat up the surrounding air causing it to expand. This expansion is the thunder clap that you hear. The heating burns the air and gives off that burning smell and a very bright flash.

Generally only a high speed camera can see the earlier lighting flashes that occur from each lower path discharging (going from the ground to the cloud). Since the top of the cloud is also charged, lighting occurs between the top of the cloud and the upper atmosphere. Most lighting occurs inside the cloud where the distance between charges is the shortest. If you measure the time between the flash and the thunder clap you can measure the distance to the lighting bolt.

Note: The charges are pooled in a shape similar to the bubbles in a carbonated drink when opened.

You can create very small lighting bolts yourself in dry air. Statically charge yourself and then touch a conductor like a doorknob. The pooled electrons on your skin will flow through the moisture in your skin to the doorknob. If you leave a little gab between your hand and the doorknob a small lighting bolt will occur.