It is the indication of how sensitive a film is to light. It is measured in numbers e.g., 400, 100, etc. The higher this number is, the more sensitive the film is and this in turn equates to finer grains in the shots you are taking. This is the definition of ISO, according to traditional photography/ film photography.
In digital photography, ISO measures the sensitivity of the image sensor. The same principle used in film photography also applies; the lower the number, the lesser the sensitivity of your camera to light.
Higher ISO settings are generally used in darker settings to get quicker shutter spends. An example is when you want to freeze the action in lower light while in an indoor sports event. The higher ISO settings lead to noisier shots.
Very many people opt to keep their digital cameras in Auto-mode. Such a camera chooses the appropriate ISO settings depending on the conditions you are shooting in; the cameras try to keep it as low as possible. However, some cameras will give you the opportunity to choose what ISO settings to use.
When you use the manual ISO settings, you will notice that it also influences the shutter speed and aperture needed for a well exposed shot. For instance, if you change your ISO from 200 to 600, you will notice that you can shoot at a higher shutter speed and/or a smaller aperture.
If there are lots of lights, you want little grain, are using a tripod and your subject is stationary, you need to use a low ISO.
If it is dark, you want some grain, are not using tripod and your subject is moving, you need to increase your ISO so that it will enable you to shoot at a faster shitter speed and also expose the shot well.
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ISO is a very important aspect of digital photography. You have to understand its importance to get a better understanding and control of your digital camera. Experimenting with different settings gives you more exposure and also helps you understand ISO better.