To track inventory by product: 

1. Create a new product or Edit an existing one 
2. In Inventory section, Select Manage Inventory By Product 
3. Specify In Stock Quantity. This is the number of products you have in stock  
4. Specify Out of Stock Quantity. Your product will become unavailable when your In Stock Quantity reaches this Out of Stock Quantity.
5. Specify Low Stock Quantity. This is useful for reporting and to get real time notifications when a product falls below a defined stock level. 
6. You can configure the product's Low Stock Action to do nothing, Disable Buy Button, or mark product as not active when its stock level reaches the Low Stock Quantity
7. An email can automatically send Low Stock Notification to a store admin or other configured email account in real time when the stock reaches the Low Stock Quantity
8. Select Yes to Show Stock Availability if you would like to display the product availability on the product page. Select Yes to Show Stock Quantity if you want the actual number of products in stock to appear on product page; otherwise, a generic message such as In Stock appears. Select Calculated Stock Availability so the store can automatically show whether the product is in stock or not using the real time inventory information. Use In Stock or Out of Stock options to force the product page regardless of the actual inventory levels.  

Out of Stock Quantity
Normally you could specify 0 for Out of Stock Quantity which makes sense. The product is out of stock when we don't have any inventory left. However, you could also keep a buffer such as a quantity of 5 if you must maintain a minimum stock for your brick and mortar store. It's also useful in case of inventory accuracy errors so you're not in a situation where you over sold and cannot physically locate the goods. 

To track inventory by product variant: 

1. Create a new product or Edit an existing one 
2. Create variations if they don't already exists
3. In Inventory section, Select Manage Inventory By Variant
4. Inventory is managed for each unique option. For example, let's say you're selling a T-Shirt in Red & Black color and Medium & Large size. That's 4 different unique SKUs (Stock Keeping Units). Click Generate Combinations to automatically generate all possible combinations.