We do not have 100% complete understanding on how reading works (yet), but there are several theories on the general process. In 1886, there was an experiment by psychologist James McKeen Cattell where he showed a sequence of letters and words to the participants and he found that they were more likely to recognise words rather than letters individually. This is called the word superiority effect. However with some other studies, it seems that word superiority effect is caused by the letter combination and not because of the familiarity with the word as a whole, or even word shape. We recognise words because of the letters contained in the word.