A key date is a coin that is usually the last to be purchased for a coin collection because the date or the date and mint mark combination are exceptionally rare or hard to find. It is usually one of the most expensive coins in the series that you are collecting and one that most collectors need to complete a particular coin collection.
What Makes a Particular Coin a "Key Date"
There are several factors that go into determining what numismatists considered a key date coin. There are also many factors that determine the price or value of the key date coin. Some of these factors may include the mintage, survival rate, condition rarity, and its popularity.
The initial mintage of a particular date and mint mark combination of a coin is what makes a coin a key date. As coins come flowing off of a coin press, they are all considered uncirculated. This is the starting point for the possibility of a coin that was minted in the early 1800's surviving until today. The lowest mintage coins are usually considered the key dates. However, this may not always be the case. As coins are placed into circulation some of them may be lost or melted for the intrinsic value of the precious metal contained in the coin.
After a coin is initially minted, it is introduced into circulation. From there, people use these coins in everyday commerce. During the life of a coin, it may be lost or retired from circulation if it is excessively worn or damaged. If someone saves the coin and it is passed down from generation to generation, it can then be added to your collection. However, if it was lost or destroyed, it will never again be part of any coin collection. For example, the United States Mint melted millions of silver dollars under the Pittman Act of 1918 where 270,232,722 uncirculated silver dollars were melted into bullion. These coins will never be able to be added to someone's coin collection because they didn't survive.
The better the condition of a coin, the more valuable it is. The coin's grade in a set you are trying to assemble will determine which coin is the key date. For example, most people consider the 1909-S V.D.B. Lincoln cent to be the key date in the series. For the most part, they are correct. However, if you are trying to assemble a set of uncirculated Lincoln cents, it will be harder to find a 1914-D Lincoln cent in MS-65 Red than a 1909-S V.D.B. in the same grade. Therefore the 1914-D is the key date for an uncirculated set of Lincoln cents.
A low mintage coin with a low survival rate doesn't always necessarily mean that it will be the key date for the series. For example, it will be easier for you to find an 1886 Liberty Head nickel in Proof-63 (with a mintage of 4,290) then the same year in uncirculated condition MS-63. The proof coin is selling for approximately $650, while the uncirculated coin is selling for over $3,000. This is mostly due to the fact that very few people try to assemble a collection of Proof Liberty Head nickels and therefore, demand for them is very low.
Conversely, take the popular Lincoln penny where demand for all dates and mint marks is very high. For example, the 1914-D Lincoln cent (with the mintage of 1,193,000) in uncirculated MS-63 condition sells for over $3,000. Remember, there was over 1 million of them made, but demand by collectors drives the price to extreme limits.