Type in Photoshop is either point type or paragraph
type. Point type is added to a document at a specific location
(or point) in the image. In contrast, area type (also called paragraph
type) fills a portion (or area) of the image.

Point type is often used for single lines of text,
such as headlines, and paragraph type is used for large blocks
of text. Note the difference between the highlighted point type
(top) and the paragraph type container (bottom).
The area type bounding box can be re-sized by dragging any of
the anchor points around the outside with the Type tool. When
you re-size the bounding box, the text within "re-flows"
to adjust to the new dimensions. On the other hand, if you use
a Transform command with point type, the type is scaled.

Here are the primary differences between the two
categories of type:
• Point type continues in a straight line unless you press
the (Return) [Enter] key to insert a line break. Paragraph type
automatically wraps to the next line when the text reaches the
boundary of its box.
• The space occupied by point type continues to expand as
more characters are added. Paragraph type is restricted to the
designated rectangle; characters that don't fit in the rectangle
are hidden.
• Point type is added from the specific spot in the image
where the Type tool was clicked. Paragraph type is added from
the top of the bounding box.
• To add point type, click with a Type tool. For paragraph
type, drag with a Type tool to create a rectangle to fill with
the type.
• Resizing the bounding box around point type scales the
type. Resizing the container rectangle for paragraph type forces
the text to reflow within the container; the type maintains its
original size and proportion.
Consider point type to be similar to headlines
in a newspaper or magazine. It typically occupies one line, but
might require two or three lines. To add lines, type to the desired
width, press (Return) [Enter] to move to the next line, and continue
typing.
Paragraph type, on the other hand, can be compared
to the body text of a newspaper or magazine. It flows from one
line to the next, and if you go back to the beginning and add
a word, the text repositions itself, automatically adjusting the
line breaks.
Consider one of the major differences between a
typewriter and a word processor. With a typewriter, you must be
aware of the warning bell that indicates you've reached the end
of a line, the edge of the paper. You then advance the paper,
return to the left margin, and begin typing on the next line.
With a word processor, you can continue typing and the text will
automatically wrap from line to line.
With a typewriter, if you need to go back to the
first line to add a word, the length of that line is thrown off.
If it's a long word, you can't just erase the top line and retype
it; you have to retype the entire paragraph. Adding a word to
the opening line with a word processor simply moves all the text
to the right and, if necessary, down to the next line –
the text reflows.

Compare the pairs. Observe how adding a single word
extends the point type past the acceptable boundary, but simply
causes the paragraph type to reflow without affecting the width
of the type container.