The ISO stands for the International Organization of Standards, I know you would think they call themselves the IOS but evidently that was already taken when the organization formed. ISO ratings are a close kin to the ASA (American Standards Association) that they are actually the same number. You may be wondering what the number means well actually it's quite simple. When a lens is set to f 16 the optimal shutter speed is equal to the ISO when there is light equal to a bright sunny day with distinct shadows. The exposure is good for the sunny side of the exposure . As and example, if your camera has manual settings, try this: Set the ISO to 200, set the shutter speed to 250 (the closest speed most cameras have to 200), and set the aperture to f 16. go outside on a bright sun shiny day and you should see that the exposure is close to perfect. Some call this the sunny 16 rule. In the film days before accurate light meters photographers used this as a base to determine exposures knowing that each step of degraded light would cost them a stop of exposure and with that knowledge they could figure out the exposure for just about any type of sunlight to sunset by just remembering the scale. 1 stop slight overcast, 1 more stop for heavy overcast, 1 more stop for rain or heavy clouds, 1 more stop for shade and 1 more stop for almost sunset. I slightly over simplified it but I hope this helps.
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It's basically the same as the ISO rating used for film. It sets the 'film speed' of the sensor. A higher number makes the sensor more sensitive. The tradeoff is that you also get more noise (graininess) with a higher ISO. So on a cloudy day, you may have to set the ISO as high as 800 or more to be able to use the same shutter speed/f stop combination you would on a sunny day at ISO 100. Always use the lowest ISO you can get away with. knowing the right combination comes with experience.
It's pretty close to film ISO...
Much like film, the sensor in a DSLR is optimized to give you the best image quality at the lowest ISO (50-100 in most cases).
As you bump up the ISO, you push the capacities of the sensor and introduce digital noise in the image (sort of like the way higher ISO film increases film grain). At ISO 3200 and up, most dslr's introduce a lot of visible digital artifacts in the image.