Setting the hook involves pulling the rod tip up with enough force to drive the hook into the fish's mouth but not with so much force that you break your line or tear the hook from the fishes' mouth. Normally you set the hook as soon as you feel the fish take your bait. If you wait too long the fish could swallow the hook making removal very difficult. If removal is not possible without harming the fish you should cut your line as close as possible to the hook eye and leave the hook in the fish. It will rust and fall our in a few days. If you set the hook too soon you may not give the fish enough time to get the point of the hook into it's mouth, thereby missing the set.
There are a variety of hook designs on the market. A basic hook that most beginners will use is a "J" hook. It is exactly what is sounds like in that it is shaped like the letter "J". It is designed to hook the fish anywhere the point makes contact. The only problem with J-Hooks is that they teach the fish a lesson. In other words, if the hook point stings the fish without actually catching him the chances are slim that the fish will try to bite it again. J-Hooks come in plain shank and long shank varieties. Longer shanks make hook removal easier.
On the other end of the spectrum is a circle hook. Unlike the "J" hook the circle hook is designed to only hook the fish in the side of the mouth since the hook point is turned in toward the hook shank. A very important point to remember is that you never set a circle hook. You simply reel in slowly and the hook will do the rest. If you jerk the rod to set the hook it will simply pull the complete hook out of the fishes mouth without catching it. However, the fish is likely to try again since the point of the hook never made contact with the fish. These are 2 hooks you should be familiar with, there are about 100 more types with slight variations in the designs.
Another type of hook worthy of mention is the treble hook. It's basically 3 hooks coming out of 1 shank with the points spaced equally apart in a circle. These hooks decrease the chance of the fish throwing the hook out of its mouth but also make removal more difficult.