SQL Server is the Microsoft relational database management system. Being such, it is a system that manages data according to a relational model. In such a system, data is stored in tables. The relationship between data is stored within the tables as well.
It typically has three major components. The first of which is the engine. It functions in the lookup, sorting and other actions. The SQL Server also has metadata like the msdb and the system databases. And then there are also the user databases which typically store the data.
When SQL Server is installed, the system will only acquire one set of scheduling information, security credentials, temporary files and other metadata. However, there are cases when it would be useful to install more than one SQL Server. Running multiple copies of SQL Server using instances is possible. Instances would generally share only a few files such as those that deal with client tools. Using them would permit having two system administrators. It also enables the system to have more than one security settings for the system.
Another advantage an SQL Server instance would bring is the ability to use more than one version of SQL Server. For example, an instance of SQL 6.5 can function with more instances of other SQL Server versions. One can actually install instances after the SQL Server is installed. One can utilize instances to install many versions of SQL Server on the same system as well.
For SQL 2000 and 2005, the maximum number of instances allowed is 16 while the 2005 Enterprise Editions allow 50. However, while such number is allowed one should bear in mind that he is sharing the server resources among them. He should therefore expect deterioration in performance especially if more than one instance is doing heavy work.