Microgrid concept provides suitable context for installing distributed generation resources and providing reliability and power quality for loads. During grid connected mode of microgrid, all stability issues are getting handled by main grid due to its sufficient inertia. But when islanding occurs, microgrid faces stability-related problems. This paper presents the state space model of isolated microgrid along with load dynamics. This paper investigates the effect of static load, induction motor type of dynamic load and composite load on the stability of the island microgrid. The paper also studies the effect of damping and inertia on the stability of the microgrid. The performance of the test system is evaluated using MATLAB simulation software. The present studies show that during the planning of the microgrid, effect of types of loads and load changes should be considered for stable operation of the system.