"Touchstone" means a stone, usually jasper or a dark schist stone, that, with a touch upon it of a metal, can tell the grade of alloy or purity of the metal. Alloy's, of course, are precious metals (gold and silver) that are mixed with lesser metals to make them more sturdy; more functional; more practical (or, in days gone by, a cheaper way to pay for goods if the alloy can be passed off successfully as a pure metal). It is important to understand the meaning of touchstone in order to rightly understand the role and characterization of Shakespeare's Touchstone.
Regarding Touchstone, while his role may be looked at from the direction of finding worth in the other characters, it may also be looked at as uncovering the worthlessness of other characters. In addition. Touchstone, like dark schist or jasper, has no additional value or nobility attached while functioning as a touchstone. Worth valuation is something that happens despite, in spite of, Touchstone's participation.
Fools in Shakespeare perform the function of revealing the flaws of the principal characters. They also have the privilege of advising the principals. Touchstone fits this function as the companion of Rosalind and Celia. He additionally fulfills this function as the touchstone to any character who meets him. He reveals the worth of Audrey, who though simple, is shown to be a worthy country woman (if her replies are taken as innocent and word play instead of self-accusatory). He exposes the true nature of Jaques through wit applied to some of Jaques melancholic musings (as a result of this, Jaques abandons life as Duke Senior's follower and chooses a different path: "I am for other than for dancing measures"). Thus Touchstone lives up to his name by showing the inner quality (good or bad) of the characters he meets.
A fool, a fool! I met a fool i' the forest,
A motley fool; a miserable world!
As I do live by food, I met a fool
Who laid him down and bask'd him in the sun,
[He] Says very wisely, 'It is ten o'clock:
Thus we may see,' quoth he, 'how the world wags:
'Tis but an hour ago since it was nine,
And after one hour more 'twill be eleven;
And so, from hour to hour, we ripe and ripe,
And then, from hour to hour, we rot and rot;
And thereby hangs a tale.' When I did hear
The motley fool thus moral on the time,
My lungs began to crow like chanticleer,...