Understanding LayersIf you're totally unfamiliar with layers in graphics software, they can be a bit difficult to grasp at first. You can think of each layer in a document as a sheet of clear transparent film. When you paint on one of the sheets, you can still see through the unpainted areas of the sheet. When you stack the sheets, the painted areas on the lower sheets will show through the transparent areas of the sheets above.
In Photoshop and most other image editing software, the transparent portions of a layer are displayed as a gray and white checkerboard pattern (unless the image contains a background). The checkerboard pattern is not part of the document, it's just there to help you identify the transparent areas.
Take a look at the example shown here. The large square shows three layers stacked--a fish, a butterfly, and a star. The three smaller squares show the contents of each layer. You can tell by the way the objects overlap that the fish is at the bottom of the stack, the butterfly is in the middle, and the star is at the top of the stack. Your image editing software treats each layer as if it were a separate document so that any editing functions are only applied to the active layer.
When you open an image such as a digital photo in your image editor, normally the image opens with only a background layer. The background is a special layer that cannot have transparency and always remains on the bottom of the stack. When you stack additional layers above the background, the background will show through the unfilled portions of the layers above it.