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The permissions system is there to define the way in which objects can be used as they move from avatar to avatar. Each and every item of content, from textures and notecards through to objects and clothing can have their permissions set on the properties (right click it in your Inventory and choose Properties), or through the Edit pane (right click Edit it) - assuming that you have permission to do so of course. There are three main flags that can be set for the Next Owner.

Modify

Having this ticked will allow the next owner to edit the item, stretch it, open it, pull it apart, unlink it and so on. An item with this setting unticked will be protected from tampering, and is known as being NoMod. A lot of content that you buy from other people in-world will be NoMod to protect the maker.

Copy

Ticking Copy will mean that the new owner can make infinite copies of the object - which will happen automatically when they drag it from their inventory (the original will stay in the Inventory and a new copy will actually be rezzed in-world). Unticking this prevents copying, and this is referred to as being NoCopy.

RESELL/GIVE AWAY (Transfer)

Ticking this will enable the next owner to hand the item to others, or sell it. Unticked, it cannot be transferred on to others (usually referred to as being NoTrans).

If an object can't be copied, it must be transferable, and the permissions system will enforce this restriction.

Permissions within permissions

One of the trickiest aspects of permissions is that they remain in effect even when the item is being used as part of another, or within another, object. For example, if you use a NoTrans texture as part of a house you have made, that entire linked house will become non transferable too - because though every other part of it is transferable, that texture isn't. This can make things hard later on in your build, when making complex objects - so it is worth checking permissions on anything you use on the construction before you use it. The same applies if any element of an object is NoCopy. Putting a NoCopy script into an otherwise copyable object will make the whole object uncopyable.

So to summarize: containers inherit restrictions set on any of their component parts.

Other options that can be set for an item are:

Share with Group
Put simply, this means that other members of the group will be able to use this object, move it around and so on. The objects needs to be set to a group for this to have an effect.

Allow anyone to move
Fairly self explanatory; anyone else, regardless of group, can move it around.

Allow anyone to Copy
Useful if you want to let people take copies without having to buy the object. It just becomes publicly copyable (anyone can right-click Copy the item).