This varies from version to version of Word.
In Word 2002 (XP) (possibly Word 2003 also):
1. Click the Tools->Options menu item.
2. Click the Security tab.
3. Put a password in the Password to Open text box. WRITE THIS PASSWORD DOWN. IT'S TOO DARN EASY TO FORGET IT WHEN YOU NEED IT AGAIN.
4. Click OK.
5. Enter it again.
6. Click OK.
Now whenever someone goes to open the file, they'll receive a dialog box asking for the open password. Note that this also encrypts the file — it will not be readable without the password.
In Word 2007:
1. Click the round Office button in the upper-left corner of the window.
2. Click Prepare, then Encrypt.
3. Enter a password in the list box. WRITE THIS PASSWORD DOWN. IT'S TOO DARN EASY TO FORGET IT WHEN YOU NEED IT AGAIN.
4. Click OK.
5. Re-enter the password.
6. Click OK again.
Hope that helps.