Click and Drag
Press the physical button, then drag. While the button is depressed, you can reposition your "dragging" finger without letting go of what you're dragging.
One-Finger Tap & Drag
With Dragging enabled, tap the trackpad twice and start dragging on the second tap (instead of lifting your finger from the trackpad). There is a short delay from when you lift your finger from the trackpad and when the drag actually ends, during which, you can reposition your finger on the trackpad to continue dragging. To end a drag immediately (without the delay) you can tap the trackpad again.
Tap the trackpad with three fingers and drag all three fingers. This has the same delay as the one-finger drag, so you can reposition your fingers and continue dragging. Again, a single tap will end the drag without the delay.
Drag Lock works with both the "one-finger tap & drag" and the "three-finger drag". When enabled, the drag does not end after lifting your finger(s) from the trackpad. Rather you have to tap/click the trackpad to end the drag.
In Snow Leopard, the Dragging and Drag Lock settings are in
System Preferences > Trackpad, but in Lion they were moved to
System Preferences > Universal Access > Mouse & Trackpad > Trackpad Options.
With Dragging enabled, you may notice a delay when tapping compared to when it's disabled (at least in Lion).
Three-Finger Drag with Inertia
This is easily the most fun way to drag. This is like the three-finger drag, but instead of moving all three fingers, you only move one finger, keeping the other two in place on the trackpad. When you do this, you can use a flick gesture with the finger that's moving and whatever you're dragging will continue to move after you lift that finger, gradually slowing down. It works very much like scrolling with inertia. As long as you keep your other two fingers in place on the trackpad, you can lift your third finger without letting go of what you're dragging.
If you wanted to, you could actually keep one finger in place on the trackpad and use two fingers for dragging, but that's a bit awkward.