There are three different kinds of styles: paragraph styles, text styles and table styles. Paragraph and text styles are closely related, table styles are actually completely separate.
As their names suggest, paragraph styles are for formatting entire paragraphs, text styles are for formatting text only. See Defining styles and Formatting text with styles and for details on how to define and use paragraph and text styles.
Table styles are used for tables only and do not have anything to do with the styles used for formatting text and paragraphs. However, the rules of dynamic styles and dynamic inheritance also apply for table styles. See Table styles in the Working with Tables chapter for details on using table styles.
These are the most commonly-used styles. They include all style attributes (font and paragraph, including borders and background colors) and they are used for controlling the general layout of your entire project. A paragraph style is generally applied to one or more paragraphs. Note that border and background attributes are set separately but they are actually a subset of the paragraph attributes.
These styles only include font attributes. They are used for applying standard formatting to individual passages of text.
Using paragraph styles as text styles:
If you select text within a paragraph and apply a paragraph style only its text attributes will be applied. Effectively, the paragraph style is used as a text style when you do this.
In the style selector in the Ribbon paragraph styles are identified by a paragraph symbol, text styles by an underlined a symbol.
Yes. The division between paragraph and text styles is actually made for convenience. In reality all styles can always store all possible style attributes.
You can always convert a text style to a paragraph style simply by adding paragraph attributes to it. This is possible even if the style is based on another text style because you are adding attributes, not taking them away, and this does not cause any problems in the style's dynamic inheritance tree (see below).
You can also convert a paragraph style to text styles, but this is a little more difficult. If the paragraph style is based on another paragraph style you must change its parent setting to (None) or to a text style. This is necessary because of dynamic inheritance: If a style is based on a paragraph style it must inherit its parent's paragraph attributes, and this makes it impossible for it to be a text style.
See About inheritance in styles for more information on dynamic inheritance.
Text Formatting and Styles (how-to instructions)