Thread count is calculated by summing the number of threads found in 1" of the weft and in 1" in the warp. It gives you an indication of the quality of the fabric since a higher thread count can normally only be achieved by using finer threads, offering a softer, smoother and more stable fabric.
However thread counts are not a true indicator of a sheets’ quality. This depends more on the quality of the cotton, the thickness of the thread, the type of weave (percale versus sateen) and how the threads are woven together (single threads or multiple threads). For example a 200 thread count Egyptian cotton percale would be a much better sheet than a 600 thread count sateen cotton sheet with a multiple pic weave. (ie. such as when 5 threads are woven together in 1 pass of the weft thereby effectively reducing the “true” thread count and tightness of the cloth).
So keep in mind that thread count is only one indication of quality as other factors such as weave pattern, fibre content, dyeing and finishing processes also play important roles in the overall quality of the fabric. In short, buying bed linens is highly technical and the marketing of such is rampant with smoke and mirrors. Often the best indicator of a sheet’s quality is its price and the seller's reputation.
The softness of a sheet depends on both the smoothness of the cotton yarns and the weave of the cotton yarns. Better quality long staple cottons, such as Egyptian cotton, are smoother than other cottons and give a softer hand to the sheets. In addition, a sateen weave will feel softer to the hand than a percale weave. In general, higher thread counts above 300 which use finer yarns to weave, will feel softer than lower thread counts of 200 and below, however there is not a direct relationship between thread count and softness. Another issue with thread count is single ply vs. double ply. Some companies twist two yarns to create a single yarn that is then woven into the fabric. They then claim 2x the thread count, so a 600 thread count sheet could actually be only 300 thread count, which is misleading to the consumer. North American governments are trying to eliminate this type of claim. Sheets with thread counts higher than 600 tend to be substantially thicker (due to the extra threads) and are less permeable to air. This causes them to be hotter to sleep under and heavy. In addition, to reach these higher thread counts more threads must be woven together in one pass of the weft which does not really result in a tighter weave. Thread count is not always indicative of a better quality sheet.