From the Intersex Society of North America: “People who identify as transgender or transsexual are usually people who are born with typical male or female anatomies but feel as though they’ve been born into the “wrong body.” For example, a person who identifies as transgender or transsexual may have typical female anatomy but feel like a male and seek to become male by taking hormones or electing to have sex reassignment surgeries.”
People who identify as transgender may also elect not to undergo gender-reassignment surgeries or present as stereotypically male or female.
People may self-identify as one gender, both or neither; others may identify as gender-fluid.
Use only when relevant to the story. Use transgender at first mention, thereafter trans, and only as an adjective: transgender person, trans person; never transgendered person or a transgender.
A transvestite is a person who dresses in a style or manner traditionally associated with the opposite sex. Their gender does not change. A man who dresses as a woman is still a man (if he self-identifies as such).
A drag queen is a person, usually male, who dresses and often acts with exaggerated femininity and in feminine gender roles for comic, dramatic or satirical effect. While drag is very much associated with gay men and gay culture, there are drag artists of all sexualities.
On pronouns: Use the personal pronoun (she, he) preferred by the subject; do not avoid using gendered pronouns simply because a subject identifies as transgender.
See also: gender neutrality