Here is a picture of a chain wear indicator on a new chain. Note that it reads 0.04mm. That would be a happy chain.
Here is a stretched or elongated chain. The tool reads 1.73mm. That would be a sad chain.
As you can see from this picture there are two grooves in the chain pin that correspond to the inner plates of this chain.
That wear occurs only on the side of the pin that experiences load.
The grooves can get quite deep.
A worn chain will wear out the teeth on the cassette and chain-ring(s).
Worn teeth can lead to things like chain suck, slipping under load and poor shifting. A worn chain is also more prone to break. If you replace your chain before it is worn out you can almost always avoid these problems and actually save money.
Be the first to correctly answer the following trivia question and win the Park Tool CC-3. E-mail answers to firstname.lastname@example.org.
If using a ruler to measure chain wear, how much can a chain stretch (in inches) before it is considered worn out?
Edit: We have a winner. The answer is 1/16". Thanks for playing.
Here are a few links if learn more about measuring chain wear with a ruler;