Watch the Building Diminished Chord Triads online guitar lesson by Rob Garland from Chord Navigator: CAGED Triads

A diminished chord (o) contains a root, b3rd, and b5th and is considered a dissonant unresolved sounding chord often used as a passing chord to connect two other chords.

For example: C - C#dim - Dm - G - C. To build it, simply lower the 3rd and 5th. I'll use a C chord (C-A-G-E-D "A" shape) as an example played from the C root on the A-D-G-B strings. Lower the G to Gb (b5th) and the E to Eb (b3rd) and you have a C diminished triad. Look at the way the bass note on the A string (and same note on the G string) moves chromatically through the chords, another example of voice leading.