There are different types of editing and different levels at which it can be done. I'm sure there are several ways to break it down, but here is how I like to think about it. Proofreading is the simple check for typos/grammatical errors. It's what word processors try to do. Copyediting (or line editing) is a more thorough proofreading that also tries to improve grammatical style, checks for consistency, and overall readability. Story editing (or structural or developmental) is big picture stuff: plot points, theme development, characterization. All three are needed to make a book the best it can be. But when are they needed? And who does them? And how?
It's a common question from writers: should I edit my work as I go? or just keep writing and edit afterward? There's no right answer - it's about finding what works for you. The advantage of doing some editing as you go is that you will end up with a cleaner manuscript when you are done. The disadvantage is that you might never get done if you spend all your time editing and not writing. Try it different ways to see how it goes, but make sure that you are always moving forward at a pace that will allow you to finish within a reasonable time frame (reasonable is open to interpretation). Personally, I don't go back over my writing to edit until I've finished the whole thing. But I do edit while writing to try to make the first draft fairly readable. It's a fine balance.
There are professional editors out there; people who just edit other people's writings. But, being professional, they cost money. If your book is purchased by a publisher they will have an in house editor to work on your writing. But your book will only get accepted if it has already had enough editing to make it decent and readable. If you can't accomplish that on your own, then getting professional help might be a necessity, not a luxury. What you need to ask yourself is the same about hiring anyone to do anything: Can I do it myself? How much time and effort will that take? Is it worth the money to save me the time and effort? And possibly create a much better result?
Here's what I do (and why). Maybe it will work for you. Maybe not. But it works for me and it seems to be a good middle ground on the options. First, I don't pay for professional editing. I'd like to, but just can't afford it. And I've found I can do a decent job on my own and with some help from friends. But it does take a lot of time, time I would rather be writing (or doing anything else). So hiring an editor is high on my list of goals when the money comes rolling in (anyone know when that will be?). Until then, I will keep doing this:
I start by writing my rough draft. Version 1. I pay attention as I write to grammar and whatnot, but I don't go back to previous sections to proofread. I grammar feel I have enough good as write I do :-) This allows me to focus on the plot, the characterization, the ideas and the narrative. I guess you could say that I do some Story Editing as I write, but not much else. When I'm done with version 1 I have a story, but I don't let anyone read it. I first go through and edit some more.
In my first round of editing I still focus on Story Editing. I make sure that the structure works, that the overall flow is good, that it all makes sense. I do this by reading the book as a book. And while my focus is the big picture, I also tend to pick up a number of typos and such. So I end up Proofreading as I go. But I try not to focus on the little things because I know I might change them entirely. Why edit a chapter if you are going to delete it? So I don't do much Copyediting yet. But I do catch most major errors. So at the end I have version 2, which should be pretty close to the final story and very readable. But definitely still with many errors.
Version 2 will get shared. I'll let people read it and give me feedback. Mostly I look for the big picture on the feedback as well. So I'm basically asking for Story Editing from folks who might not even know that's what they're doing. They also tend to pick up on some of the Proofreading items as well, so that's a bonus. At the same time I tend to be Copyediting version 2. I start looking at the wording and phrases I've used. Try to make the writing tighter, more compelling. Just plain better.
Once I've gotten enough feedback I may rewrite some things (or I might not). I generally settle on the book as it will be in its final state. This is the start of version 3. Once I've done any rewrites I begin my Proofreading and Copyediting. But I keep them separate. I start with a thorough Copyediting of the whole book. This gives me the book I want: the story I want told the way I want it told. After that is the time for a final Proofreading. This is one of the hardest things to do, proofreading your own work. But I've found a way to read without paying attention to the story. It's a mental disconnect thing, to read only for the technically aspect of the words. By separating this out it no longer becomes my work but just text. This isn't a fun way to read, but it does seem to allow me to find and correct a lot of little mistakes. And I end up with version 3.
So version 3 is the 'final' version. It's the full story, the best writing I can do, and without errors. In theory. I don't think it's quite at the professional standard. And I'm sure I could take more time and improve things. You can always improve things. But eventually you have to call it done and put it out to the world. And I think my process gives me something that I am ready to share. We'll find out shortly when I self-publish my first set of stories. Then you can tell me if my process works or if it's better to leave the editing to the professionals.
Here's a version 1 from one of my soon to be published stories, The Cost of Life. I think I got a little carried away with the analogies.
The Arrarian court is a living creature, a gigantic beast that devours its young and sheds its skin every year. For those who make up the extremities it is a constant struggle to climb towards the heart before getting shaken loose in the mad thrashings of the creature. For those already in the body of the beast it is an intoxicating ride across the land with the spear of the hunter always at your heels. For the common people it is a danger to be avoided because it cannot be tamed. For everyone it is the center of attention, the only constant being change. That is the way of the court today and the way it has always been.
And here is version 3. Same idea, different execution. Often, simpler is better (but it's been changed a little more for the final cut).
The Arrarian court is a large and complex creature, with a heart of princes and a body of royalty, arms and legs of lesser nobles, all covered in a skin of politics and feasting on the common man.