The other day a buddy of mine asked me about iso. I don't want to go too in depth about iso considering there are a bunch of resources online, but here are a few key things to know.
1) Sensitivity - ISO is the sensitivity of your film or your digital sensor. It's easy to think about...the higher the ISO # the more sensitive the sensor is to light (ie ISO 100 is less sensitive than ISO 1600).
So why would I want to change ISO?
2)Lighting conditions - During a bright sunny day there will be a lot of light hitting your sensor. In this case you can use a lower ISO because there is lots of light. If you were to go inside though, you don't have as much ambient light. Therefore you would want your sensor to be more sensitive to light and you would increase your ISO.
3)Noise - The problem with ISO is that as you increase your ISO the more visible noise you will get in your pictures. Easy rule; Higher ISO=More Noise. Noise appears as little dots on your pics. Not cool! This is especially true with point n' shoots where you will be limited to using lower ISO to get clean images. Here are some examples (thank you www.cameralabs.com for these images):
In this example the left pic was taken with a point n' shoot (Canon G10) and an SLR (Canon 450D) on the right. Even at ISO 100 you can notice that the 450D pic is cleaner, with less dots than the G10.

NOTE: the G10 is the top of the line point and shoot from Canon going for ~$500!!! Lower end cameras will probably display even greater noise at high ISOs. The 450D is the bottom of line DSLR. It goes for ~$560...check out B and H for camera prices. You can even find used equipment there. Here's a good deal on a base DSLR (Canon XTi). Only $329 used!!!
Use the lowest ISO possible for the conditions you're shooting in.
This is the key rule whether or not you have a point and shoot to get the cleanest images possible. Some newer cameras now even have an "Auto ISO" setting that does this for you. The camera senses how much light there is in the picture and then automatically chooses the lowest ISO possible to accomplish the best exposure. Use it if you have it!
Here are some more resources on ISO if you really want to learn all the intricacies:
http://www.photoxels.com/tutorial_iso.html
http://www.cameratown.com/guides/iso.cfm
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