Most people looking to build a home studio will want to center the facility around a DAW, or digital audio workstation. This will generally include a computer (PCs and Macs are fine, though older models might not have the necessary processing speed or RAM), recording software and a recording interface.
There are plenty of recording software varieties to choose from, including ProTools, Digital Performer, Logic and Cubase. ProTools is generally accepted as the industry standard, though other programs can pump out amazing recordings as well. Most of these programs feature intuitive interfaces, making them usable by recording novices and professional producers alike.
A hardware recording interface is used to receive audio signals and route them to your computer using USB or FireWire. The interface you choose will depend on the size of your studio and your ambitions. If you plan to only record yourself and perhaps one other person at a time, you only need a couple of microphone inputs. Consider purchasing a Digidesign Mbox, a small portable recording interface that includes a basic version of ProTools. If you plan to record full bands, or are simply looking for increased versatility, look for an interface with at least eight microphone inputs, such as a PreSonus FireStudio. Professional mixing boards found in professional studios can include forty or more mic inputs.
Next, you'll need to purchase some microphones. The microphone will be the absolute beginning of your recording chain, and a low-quality microphone will produce low-quality results. Look for versatile, affordable microphones, such as the Shure SM57 and SM58. These microphones are great for a number of applications, from snare drums to voices to guitar amplifiers. An SM57 can be purchased online for less than $100.
You'll need a microphone stand and XLR cable for each mic you purchase. Specialized stands are available depending on their application; for example, if you plan to do a live stereo recording, consider purchasing a stand with two microphone seats, or holders, arranged as a stereo pair.
Effects processors are the next investment to look into when building a home studio. Today, there are plenty of software plug-ins that you can purchase and install into your recording software. Home recordists with a higher budget will probably be interested in outboard effects processors with specific purposes, such as a reverb processor or auto-tuner.