Create a format: broadcast music, talk or a combination. Within the format you create a theme. You could play music by local bands, or focus on specific genres such as jazz, hip hop or punk rock. Having a focused theme will help you build a base of listeners.
Download streaming server software such as Shoutcast, or buy server space from a third party service such as Wavestreaming or Live365. See the Resources section for links. You could turn your home computer into a server, but then your computer will need to be on and connected to the Internet whenever you want the radio station active, and the station will use your home Internet bandwidth. On top of that, you'll need to pay all of your licensing fees yourself if you want to play copyrighted music. The best option is to purchase server space online. Streaming radio services are each a little different, but for a monthly fee each will allow you to stream recorded and live audio from its server and give you software that will let you manage your radio station from your desktop. With many streaming radio services the licensing fees are included in the subscription cost, so you can play copyrighted music without worrying about licenses or fees.
Put together your playlist using the software provided by your streaming radio service. Keep your format and theme in mind when you're making the playlist. Consider grouping songs together that have related themes, moods or styles. Your playlist should be long, or else it will quickly get repetitive. If you want variety you could put together a number of different shows, each with a different theme.
Update your playlist every day. If listeners hear the same thing day after day, they'll quickly stop tuning in.
Create an instant messenger address for your radio station and post it with the listing provided by your streaming service. That way, listeners can write in requests. Taking requests is a great way to build a relationship with your listeners and keep them coming back. If you have a microphone, go on the air live when you play a request. Telling your listeners that the song is a request, who requested the song and other information the caller gave is a good way to add a personal touch.
Advertise your radio station everywhere you can. There are thousands of Internet radio stations, and most have barely any listeners. If you want listeners, you need to get the word out. Create pages for your radio station on social networking sites, tell your friends to listen, put up fliers at record stores and music venues, or whatever else you can think of. If you're willing to spend money you can purchase Internet advertising such as sponsored search results.
Keep at it! When you're running an Internet radio station you're your own boss, so there's no one to make you do the work except yourself. It takes time to build up a base of regular listeners, so be patient if things start off slow.