Winged Light appears all around the world of Sky, often in the form of glowing silhouettes. When you’ve collected enough Winged Light you can level up your Cape, which allows you to fly higher and farther while exploring the game.
Your Cape’s level is represented by stars on the back of your character’s Cape.

If you lose a Winged Light during your adventures, you have a few seconds to recollect it before it disappears. If you see a fellow player lose their Winged Light, you can assist by collecting it for them. If the Winged Light isn’t collected in time and disappears, it will reappear at random in one of the locations from which you previously collected a Winged Light.

The following portion contains end game spoilers, so please proceed with caution.

There are special kinds of Winged Light that are granted after your character completes the Eye of Eden and is reborn. These come from ascending the Spirits, by unlocking the upper portion of their friendship tree using Ascended Candles. Ascended Candles are obtained by depositing Winged Light in the Storm portion of the Eye of Eden level. You can ascend Spirits from the constellation menu any time, but you can only collect these special Winged Light buffs when being reborn. Once you've unlocked these special Winged Light buffs, you will receive all of them every time you're reborn, enabling you to start your next life with a higher cape level.