As a starting point let me just say that at the heart of every fairy-tale there are 2 things:
1. The plot
But before we can understand what a fairy-tale is we need to know what a fairy-tale isn't...
Myths do not have magic. Sure there are supernatural elements, but those involve the power of the gods, not magic. Myths are also believed to be true. The myths of ancient Greek and Roman gods are mystifying to their followers and instill the ideology of gods holding immense power over mankind.
The word legend comes from the Latin legenda, meaning "that which is to be read." This is in contrast to fairy-tales which were passed on as an oral tradition. Legends also deal with ordinary people who eventually experience some sort of extraordinary event.
Now there are a few types of legends, including local and saint legends.
Saint legends aren't quite as specific on the setting of their stories. This is due to the fact that their purpose is to reaffirm people's faith in Christianity. This can be compared to the purpose of a myth, however these legends deal with ordinary people instead of gods.
Local legends (of course) deal with locality; naming a specific town or city, as well as a time or year of occurrence.
The concept of time, however, does not exist in fairy-tales. Tales often begin with the phrase, "Once upon a time" or "Es war einmal." This saying does not indicate a time (or year) in which the event occurred. An example of fairy-tale's ignorance of the rationality of time is present in the story of "The Brier Rose" or "Sleeping Beauty." It is said that the princess is asleep in a tower for 100 years, yet she possesses the same amount of youth and beauty when she awakens.
The magic in fairy-tales is seen as a normal occurrence (talking animals, curses and spells), but is used solely to move the story along its course. Fairy-tales do not have eloquent descriptions. The actions of the characters are used to describe the story. As listeners/readers we are to use our imaginations to picture the actions taking place.
Lüthi, Max. "The Dragon Slayer: The Style of the Fairy Tale." Once upon a Time:
On the Nature of Fairy Tales. Bloomington: Indiana University, 1976. 47-57.