The Enclose in Element command is enabled in Grid View only. It encloses a selected text range in a new element. The new element is created inline around the selected text. If you are editing a document based on a Schema or DTD, you will automatically be presented with a list of valid choices for the name of the element in which the text is to be enclosed.
For example, in the screenshot below, the text Nanonull in the para element is highlighted.
When you select the command Grid View | Enclose in Element, the text "Nanonull" is enclosed in a newly created inline element and a list appears offering a choice for the name of the element. These elements are defined in the schema as children of para.
The selection you make will be the name of the new element. Alternatively, you can enter some other name for the element.