Multipotent stem cells in the body facilitate tissue regeneration, growth, and wound healing throughout life. The microenvironment in which they reside provides signals that direct these progenitors to proliferate, differentiate, or remain dormant; these factors include soluble molecules, the extracellular matrix, neighboring cells, and physical stimuli. Recent advances in the culture of embryonic stem cells and adult progenitors necessitate an increased understanding of these phenomena. Here, we summarize the interactions between stem cells and their local environment, drawing on in vivo observations and tissue culture studies. In addition, we describe novel methods of characterizing the effects of various environmental factors and review new techniques that enable scientists and engineers to more effectively direct stem cell fate.