His 1895 testament stipulated his fortune was to be placed in a fund destined to honour "those who, during the preceding year, shall have conferred the greatest benefit on mankind".
He died a year later in San Remo, Italy.
Nobel had decreed the bulk of his estate should be invested in "safe securities" and, as a result, some 31.5 million Swedish kronor, the equivalent today of about 1.7 billion Swedish kronor ($268 million, 197 million euros), were used to create the Nobel Foundation.
Nobel's will specified that equal prizes should be given for the "most important discovery" in physics, chemistry, medicine, as well as the "most outstanding work in an ideal direction" in the world of literature.
A fifth prize would be for peace, "to the person who shall have done the most or the best work for fraternity between nations, for the abolition or reduction of standing armies and for the holding and promotion of peace congresses."
Since 1901, the year the first Nobel prizes were awarded, the Nobel Foundation has funded the awards.
This year's laureates will receive eight million Swedish kronor (around $932,000 or 831,000 euros) per award, to be shared if there are several winners in one discipline.
When Nobel died childless and the will was read, the contents surprised many, including his own family.
The document was challenged by two nephews who tried to have it declared null and void, and even King Oscar II of Sweden opposed Nobel's wishes, saying they were not "patriotic minded".
Adding to the confusion, Nobel had not appointed an executor for the testament, nor had he consulted the various institutions he had assigned to award the prizes to ensure that they were willing to undertake the task.
After more than three years of haggling, the Nobel Foundation was created to manage the capital in the inventor's estate and four separate institutions agreed to award the prizes as Nobel had wished.
The Karolinska Institute awards the medicine prize, the Norwegian Nobel Committee awards the peace prize, the Swedish Academy handles literature, while the Royal Academy of Sciences has responsibility for physics, chemistry and economics.