In the simplest of terms – A higher ISO setting allows for an increase of light to be applied to the image. This allows for a narrower aperture and/or a faster shutter speed – which in turn will allow for either a greater depth of field and/or crisper motion capture.
The consequence is that it can generate noise in your image. A higher ISO 800-1250+ will start to add noticeable graininess and only increasing the noise the higher one goes. This will be even more noticeable in the darker parts of your photograph; which is bad, considering you are likely trying to take a picture in a dark place.
Some cameras handle this better than others, but a good rule of thumb is to stay at or under ISO 800. High end consumer and pro SLR camera models can give you as much as 1600 ISO with very little grain. But of course, the lower the ISO, the cleaner your image will appear – a range of 100-200 is preferred.
Common use for a high ISO setting would be night photography, concerts or dim interiors, typically accompanied by a wide aperture and fast shutter that prevents blur. This also limits your depth of field, but will help in capturing people and faces. Additionally, freezing motion in bright light may require a high ISO accompanied by a fast shutter and a greater depth of field (narrow aperture) to compensate for erratic movement patterns of a bird for example.
Ideally, you will want to manually control all 3 settings (aperture, ISO and shutter) for both motion and dim lighting scenarios.
The only way to manually adjust ISO is using manual mode – the “M” on the dial. If going full auto is not your cup of tea – stick with the scene selections.
Learning assignment: Manually control your ISO, associated aperture and shutter to produce a crisp, lighted, night street scene. This is best taken with a tri-pod, a low ISO (100-200), a slow shutter and narrow aperture to give you the best depth of field and clear non-moving objects. Anything with motion will be blurred, if visible at all and lights will begin to glow unnaturally the slower your shutter is set.
Above all, have fun out there and try different settings for different effects.