A Skin refers to the texture that is placed onto a player model or mob. The skin is divided into areas that act as the surface area of the character (For example, there's the front head area, left leg area, etc.). A skin will only allow solid color; transparency is not allowed on the skin file except on the second head area, which is transparent by default. The second head layer can be used to give the character glasses, hats, or other accessories (even a bigger head!).
A player can change their character's skin if they purchased Minecraft. This is done on the Preferences page by uploading a valid .PNG image file, which will then replace the default skin.