Formed in 1895, the Aberystwyth Improvement Company set about the task of designing and building the line. Heading up the company was George Croydon Marks, an established funicular railway engineer.

Construction was to present several challenges. Virtually all the track had to be run in a deep cutting and then stabilised using concrete. In order to accommodate existing footpaths that criss-crossed the hillside, bridges were required to carry them over the cutting. In total some 1,200 tonnes of rock needed to be excavated, four footbridges constructed, and upper and lower stations were built - the entire project eventually coming in at a staggering £60,000.

Initially, the Aberystwyth cliff railway was designed using the popular water- balance method whereby a water tank in the upper car would be filled with sufficient fluid to make it much heavier than the lower car. In turn, gravity would force the upper car down and, as both cars were connected by continuous cables, the lower car with an empty water tank would automatically be raised. Although very efficient, the operation at Aberystwyth was hindered by the lack of a natural water supply at the summit of Constitution Hill. To resolve this, Marks constructed water storage tanks in bandstands at the summit, as well as in the lower station, pumping water between the two via a coal-fired Worthington Compound Steam Pump, also housed in the lower station. The system worked well enough but was very costly to run.

The cars were of a unique design, being stepped in line with the gradient, rather than being mounted on a triangular frame. They were of the 'toast rack' design, with reversible seat backs so that passengers could sit in the direction they were travelling. Each car could carry up to 30 passengers. A water tank, with a 4 ton capacity, was located at the 'lower' end of the car beneath the attendant's platform. At first, the cars had roofs, side curtains and rear glazing but these were later removed.

Aberystwyth cliff railway opened to the paying public on 1 August 1896, each of the 520 passengers paying eight old pence to travel the 242 m (798 ft) to the summit of Constitution Hill. Despite reductions in fares, and ever more attractions at the summit, the cliff railway struggled to meet expected revenue targets in the early years. Inevitably, this led to several changes of ownership.

Fortunes changed in 1921 when the decision was made to convert the expensive water-balance system to electric haulage. This was achieved by installing a Morley 55hp electric motor and winding gear at the top station. When the town's electricity supply was changed to AC current, power was converted to 440 volts DC by way of a mercury-arc rectifier and transformer located at the much more substantial lower station. This arrangement continued in operation until 1978 when it was replaced by the current controls.

During the 1920s and 1930s, Aberystwyth cliff railway enjoyed great popularity but, with the outbreak of the Second World War, things took a turn for the worse. Despite being purchased by the Aberystwyth Pier Company in 1948, who effected necessary repairs following the period of neglect, the railway's fortunes continued to decline. When a fault in the braking system caused the cliff railway to close in 1976, it seemed unlikely at that time that it would ever re-open.

However, very unexpectedly, a local mining company purchased the site and had it operational again within six weeks of the closure. The newly formed Aberystwyth Cliff Railway Company continued to operate the line until 1998, when it was purchased by the present owners, Constitution Hill Ltd.