The flag that indicates nationality on a ship is called an ensign. As with the national flags, there are three varieties: the civil ensign, flown by private owned vessels; state ensigns (also called government ensigns), flown by government ships; and war ensigns (also called naval ensigns), flown by naval vessels.

The ensign is flown from an ensign-staff at the stern of the ship, or from a gaff when underway. Both these positions are superior to any other on the ship, even though the masthead is higher. In the absence of a gaff the ensign may be flown from the yardarm.

In some countries, the national ensign is identical to the national flag, while in others, such as the United Kingdom and Japan, there are specific ensigns for maritime use. Most countries do not have a separate state ensign, although the United Kingdom is a rare exception, in having a red ensign for civil use, a white ensign as its naval ensign, and a blue ensign for government non-military vessels.

Ensigns are usually required to be flown when entering and leaving harbour, when sailing through foreign waters, and when the ship is signalled to do so by a warship. Warships usually fly their ensigns between the morning colours ceremony and sunset when moored or at anchor, at all times when underway, and at all times when engaged in battle.

A courtesy flag is flown by a ship in foreign waters as a token of respect by a visiting vessel. It is often a small (smaller than the ship's own national ensign) national maritime flag of the host country. The flag is customarily worn at the foremasthead of multi-masted vessels, the dockside yardarm or crosstree of the mast of single-masted vessels, while the house flag would be outboard. It may be flown from the jackstaff of vessels without masts.

The position of honour on a ship is the quarterdeck at the stern of the ship, and thus ensigns are traditionally flown either from an ensign staff at the ship's stern, or from a gaff rigged over the stern.
The usual rule that no flag should be flown higher than the national flag does not apply on board a ship: a flag flown at the stern is always in a superior position to a flag flown elsewhere on the ship, even if the latter is higher up.

The priority of hoisting locations depends on the rig of the vessel. With sloops, ketches and schooners the starboard yardarm or spreader of the highest or main mast is the second most honoured position. (That is, after the ensign at the stern.)

Next after the starboard spreader is the port spreader.

House flags (those defining the owner) are usually flown from the mainmast truck. When a club burgee is flown, it will normally be hoisted to the truck of the most forward mast. On a sloop, then, not having a foremast, the house flag could be moved to the port spreader if the starboard spreader was in use, and a burgee was being flown. On a ketch, the house flag would be moved to the mizzen.

When in port, the ensign should always be flown from the staff at the stern. This is traditional, because in former times the gaff was then lowered along with the mizzen sail. The only ensign ever flown from the starboard spreader or yardarm is that of a nation being visited. This is known as a courtesy hoisting of a courtesy Flag.

At sea, it used to be that the ensign was flown from the mizzen gaff. When Bermudian sails came into general use, some skippers started to fly the ensign from two-thirds the way up the main-sail leech. Many consider this an affectation with the past. Others have taken to flying the ensign from a backstay. These are not good locations because the flag does not fly out well when hoisted raked forward.

Another recent custom has been to fly a burgee and/or a cruising or power squadron flag from the starboard spreader. This custom has arisen because many sailboats today place a racing flag or wind indicator at the masthead.

Motor boats without masts should always fly the ensign from an ensign staff at the stern. Conventionally, courtesy flags are flown from the jackstaff at the bow. This seems to some landsmen as being a reversal of priorities. However, a boat is steered by the stern and this gives it pride of place.

Nautical etiquette requires that merchant vessels dip their ensigns in salute to passing warships, which acknowledge the salute by dipping their ensigns in return.

Merchant vessels traditionally fly the ensign of the nation in whose territorial waters they are sailing at the starboard yard-arm. This is known as a courtesy flag, as for yachts.