Point of view is one of the most difficult and frequently misunderstood aspects of fiction writing. It is not sufficient simply to ask, "Who is telling the story?" In certain uses of the third person, for example, it is clearly the author telling the story, and yet point of view may shift within the story. It is also important not to confuse the terms narrator and author. Except in the case of a truly omnisicient point of view (rarely used anymore), they are rarely the same. And beware of sweeping statements like, 'If the narrator of the story is in the story, it is necessarily first person.' No.
So let's cover the basics:
First Person. Almost always told using the pronouns I, me, etc. But not always. The Virgin Suicides, for example, employs a collective first person (we). And it is especially important in this case not to confuse the author with the narrator. The narrator has a bias, things he or she wishes to hide, etc. The author must work to tell the whole story in spite of the narrator. (That's an entire essay in itself, but I'll leave it at that.)
Second Person. Rarely used, mostly misunderstood. Basic operative pronoun is you. (Another essay in itself.)
Third Person. The important thing to remember about this point of view is that there are many different kinds of third person. (DO NOT equate third person with an omniscient POV.) There are two key variables with third person: the question of distance, and whether the POV is fixed or moving.
- third person omnisicient is the "all-knowing" POV, the bird's-eye view; it is like a camera observing the action of the story; it may or may not have access to the characters' thoughts and feeling;
- third person close (moving) is a POV in which the narration is always limited to what a particular character can see or know or hear or imagine; there is no omniscience; yet the POV moves from one character to another; there is no single defined narrator; for a great example, see Parts I and III of Virginia Woolf's To the Lighthouse (Part II is omniscient)
- third person close (fixed) is not as different from the first person as some might think; the story is told entirely within the constraints of what a given character knows and thinks and sees; the character/narrator is very much a participant in the story; the prose will very often reflect that character's voice; such stories are often as intimate and subjective as any first person story; yet the use of third person as opposed to first affords the author the opportunity to 'sneak in' a more objective reading of the situation from time to time.
The tricky and yet powerful thing about third person is that it can be modified and adjusted within a given story. The important factor is distance - some writers call it psychic distance - between the reader and the narrator. Here film provides a wonderful analogy. Just as a director can alternate between tight close-ups and distant wide shots, the skillful fiction writer can move from a close identification with a character (with direct access to their thoughts and voice) to a more distant, objective description of the action. Flannery O'Connor is especially skilled with such use of the third person.