A backstory shows what happened before the story started. The revelation of backstory secrets throughout the story helps enhance the drama in the action even if the story is in genres such as mystery, horror, and action-adventure. A backstory may be the history of a town, objects, or other elements or what happened to the characters earlier that may influence their behavior and mode of action in the plot.
In our time, most stories, especially short stories, begin closer to the end. Until about fifty or so years ago, authors wrote several pages explaining a character's backstory. Nowadays, we call this info-dump, and we try to avoid it no matter what. The backstory works better if it is given in small doses and only when necessary. On the other hand, it is very important for the writer to be well aware of the backstory even if he never tells it to the readers.
In real life, every person has a backstory or a past that influences his present and future. Knowing his characters' pasts will enable the writer to present real people to his readers. In other words, the writer needs to know where his characters are coming from so he can use just the right words to express why the characters are acting the way they are acting. Then, to create depth and to kindle the imagination of the reader, the writer may choose only to hint at a backstory and leave shadow areas. This objective can be best achieved if the writer himself is familiar with the backstory in its entirety. For this, it is necessary to make character sheets for the primary characters with emphasis on internal traits and history sheets for the objects and the setting, especially if the objects or the setting are playing an important role throughout the plot.
All short stories, plays, and novels need backstories, but the writer does not need to push a backstory on the reader as a whole. There are instances, however, when the backstory needs to be told in one chunk, such as in a long work as a prologue where an imaginary world is important to the plot.
Other methods of inserting the backstory are through flashbacks, discussions between the characters, and a very short summary of past action somewhere inside the story. The rule of thumb is, stories work better if the backstory is inserted in the first half closer to the middle rather than in the very beginning or at the end. In addition, it is important to remember to make the story more exciting than the backstory, so the backstory does not overpower the plot.
Here is an exercise for writers to test the importance of a backstory:
If you are not sure of the importance of the backstory for a writer, do this exercise to convince yourself. Either write a story just to write the plot (what happened) or write a three sentence plot, first sentence for the beginning, second for the middle, and third for the ending. Then take the setting and the characters and give them backstories. Now write the story, giving it all you've got. You do not have to include the backstories, but you should know them as you write. I bet you'll find that your story has a depth that wouldn't be there if it didn't have a backstory.