Determining these keywords is two-fold -- what is appropriate for your business and what words do your customers actually use? A great way to help figure this out is to use a tool like the one Google provides for free, the Google Keyword Traffic Estimator and the Google Keywords Tool.
Use the Google Keywords Tool to brainstorm the keywords you think would be good for your site. The tool will give you other suggestions based on your keywords, plus an estimate of the search traffic those words drive.
The Google Keyword Traffic Estimator is very similar, but allows you to search for traffic information for specific keywords.
Both tools are useful in determining which keywords may be worth more of your time to focus on than others. For example, for me, the keywords "handmade jewelry" drive more traffic then "handcrafted jewelry", so I focus on the former.
Search engines like Google change how they rank your site for keywords on a regular basis, and don't ever tell the public what their formulas are for determining their results. But in general, they reward content, relevant links, internal linking, and strong keywords (focus on a few, not on a large range, which will water down your results). So you have to stay on top of what is happening to your website in terms of rankings and always tweak, tweak, tweak.
Peggy Li Creations Handmade Jewelry