Stephen was born at Kensington Gore in London, the brother of James Fitzjames Stephen and grandson of James Stephen. His family belonged to the Clapham Sect, a Christian group. At his father's house he saw a good deal of the Macaulays, James Spedding, Sir Henry Taylor and Nassau Senior. After studying at Eton College and Trinity Hall, Cambridge, where he graduated B.A. (20th wrangler) in 1854 and M.A. in 1857, Stephen remained for several years a fellow and tutor of his college. He recounted some of his experiences in a chapter in his Life of Fawcett as well as in some less formal Sketches from Cambridge: By a Don (1865). These sketches were reprinted from the Pall Mall Gazette, to the proprietor of which, George Smith, he had been introduced by his brother. It was at Smith's house at Hampstead that Stephen met his first wife, Harriet Marion (d. 1875), daughter of William Makepeace Thackeray; after her death he married Julia Prinsep, widow of Herbert Duckworth.
While still at Cambridge, Stephen became an Anglican clergyman. In 1870, having renounced his religious beliefs, and after a visit to the United States, where he formed lasting friendships with Robert Lowell and Eliot Norton, he became a journalist, editing the Cornhill Magazine and founding the Pall Mall Gazette. R.L. Stevenson, Thomas Hardy, W.E. Norris, Henry James and James Payn figured among his contributors. In his spare time, he participated in athletics and mountaineering. He also contributed to the Saturday Review, Fraser, Macmillan, the Fortnightly and other periodicals. He was already known as a climber, as a contributor to Peaks, Passes and Glaciers (1862), and as one of the earliest presidents of the Alpine Club, when in 1871, in commemoration of his own first ascents of the Schreckhorn and Rothhorn, he published his Playground of Europe.
During the eleven years of his editorship, in addition to three volumes of critical studies, he made two valuable contributions to philosophical history and theory: The History of English Thought in the Eighteenth Century (1876 and 1881) and The Science of Ethics (1882); the second of these was extensively adopted as a textbook on the subject. The first was generally recognized as an important addition to philosophical literature and led immediately to Stephen's election at the Athenaeum Club in 1877.
Stephen also served as the first editor (1885 - 1891) of the Dictionary of National Biography.