Short answer
You invite the people closest to you: immediate family, close relatives, and your nearest friends. It is usually a smaller gathering than the wedding, so you do not need to invite everyone who will later come to the wedding. Keep it to those you truly want to celebrate with now.
The guest list for an engagement party is typically much smaller than the wedding list. You might invite parents, siblings, grandparents, a few aunts and uncles, and your closest friends. The idea is to share the news with the people who matter most, without the pressure of inviting every acquaintance or distant cousin. If you have a large family, you may need to draw a line, and that is acceptable.
There is no rule that says everyone invited to the engagement party must be invited to the wedding, but it is polite to consider that. If you invite someone to the engagement party and then do not invite them to the wedding, they may feel hurt. For that reason, many couples keep the engagement party to people they know will be at the wedding, or they make it clear the party is separate. You can also invite plus-ones if you wish, but it is not required.
Think about the venue and your budget when deciding numbers. A smaller party often feels more intimate and gives you time to talk to everyone. If you are unsure, start with a short list of people you cannot imagine getting engaged without, and add from there. You can always celebrate with a wider circle at the wedding itself. The engagement party is your chance to be selective and personal.
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