The town was founded in 1679 by the Governor of the Cape Colony, Simon van der Stel, who named it after himself — Stellenbosch means "(van der) Stel's forest". It is situated on the banks of the Eerste River ("First River"), so named as it was the first new river he reached and followed when Jan van Riebeeck sent him from Cape Town on an expedition over the Cape Flats to explore the territory towards what is now known as Stellenbosch. The Dutch were skilled in hydraulic engineering and they devised a system of furrows to direct water from the Eerste River in the vicinity of Thibault Street through the town along van Riebeeck Street to Mill Street where a mill was erected. The town grew so quickly that it became an independent local authority in 1682 and the seat of a magistrate with jurisdiction over 25 000 square kilometres in 1685.

Soon after the first settlers arrived, especially the French Huguenots, grapes were planted in the fertile valleys around Stellenbosch and soon it became the centre of the South African wine industry.
The first school had been opened in 1683 but education in the town began in earnest in 1859 with the opening of a seminary for the Dutch Reformed Church and a gymnasium which known as het Stellenbossche Gymnasium was established in 1866. In 1874 some higher classes became Victoria College and then in 1918 the University of Stellenbosch. In 1909 an old boy of the school, Paul Roos, captain of the first team to be called the Springboks, was invited to become the sixth rector of the school. He remained rector till 1940. On his retirement the school's name was changed to Paul Roos Gymnasium.

The Stellenbosch, Paarl and Franschhoek valleys form the Cape Winelands, the largest of the two main wine growing regions in South Africa. The South African wine industry produces about 1,000,000,000 litres of wine annually. Stellenbosch is the primary location for viticulture and viticulture research. Professor Perold was the first Professor of Viticulture at Stellenbosch University. The Stellenbosch wine route, established in 1971 is world renowned and popular tourist destination.

The area has a mediterranean-type climate, with hot summers, cool winters and clear, sunny skies. It is at the start of the Cape Fold mountains, which have created soil favourable to vines. Grapes are grown primarily for wine, not as table grapes.