A Phoneme is the smallest unit of speech, or sounds. I would suggest googling the word for a more detailed definition, but for my purposes, a phoneme is simply the smallest unit each word can be broken down into - c-a-t has three distinct sounds, so has three phonemes, the same as as the number of letters. m-o-u-s-e also has three phonemes the "m" sound, the "ow" sound and the the "s" sound. Phonics is a method of reading instruction which is based on sounding the words out, or building words from a set of sounds. I have found a mixed approach of phonics and whole language has worked best in teaching my own child reading, but each child learns differently, and the important thing is to find the method that works best for your child.
I do feel phonetic awareness is necessary to fluent reading though, so whether your child learns to read through phonics or through whole language, phonics are still a useful tool for spelling and decoding new words. You have probably started teaching your child phonetic awareness in infancy - whether you realise it or not. All those silly songs and nursery rhymes we sing to our babies and toddlers develop key skills in phonetic awareness, as do a large number of books aimed at very young children, including Dr Seuss, Duck in the Truck and the Gruffalo. The ability to recognise rhymes is a key skill in phonetic reading.
The next skill in phonetic reading is letter sounds. For this reason, some strict phonics advocates encourage parents and educators to teach letters by sound rather than letter name, using the most common sound for each letter. Personally, I find this confusing as so many letters have more than one sound, I have always read letter name and sound together with my young children. If I read an alphabet book I would read "Big A - little a - says "a -a -a" (I'm not sure how to spell a short a sound). My children also leaned to associate letters with a certain word. "M" is Mommy's letter - "P" is for Pingu. We have a wide variety of alphabet books and toys, but by far the most useful is a picture album with a familiar picture for each letter.
Once a child has an understanding of rhymes and letter sounds - they can begin to learn to combine these in simple words. It is entirely possible to do this without any special materials. For many years children were taught almost exclusively with a slate and a piece of chalk sounding out simple words like " cat" and "sat". Alphabet blocks are also an easy way to teach simple words, as well as magnetic refrigerator letters. The simplest words follow this pattern consonant - vowel - consonant and are referred to as c-v-c words. A basics phonics programme will start with c-v-c words using only soft vowel sounds and very slowly progress to longer words and more complex sounds. You can teach phonics without any special materials, using this same approach, start with letter sounds, then simple c-v-c words and when these are mastered start adding long vowels, combinations sounds like "ch" etc...
If you choose to teach phonics without a special programme, I can not recommend Maire Mullarney's book "Anything School Can Do You Can Do Better" strongly enough. In fact I would recommend this book to any home educator, and in fact any parent regardless of teaching methods, but it does give a very clear explanation of how they taught there children to read with very simple materials.
While it is possible to teach phonics in this manner - I do think it is much easier with with simple phonetic readers, such as Bob Books and Starfall Phonics, and I found the Hooked on Phonics programme absolutely brilliant. It is expensive, but it does provide a very complete set which will take your child from sounding out the simple phonemes right through to fluent reading. Bob Books are also an excellent resource in teaching phonetic reading and have the advantage that you can buy one set at a time ( roughly £8 new). Starfall Phonics is has wonderful illustrations but with only 12 little books starting with the most simple c-v-c words and progressing all the way through to long vowels and three syllable words, this will need some supplementation.
Several other phonics sets such as Curious George Phonics, I can Read's superheros sets and more are helpful to teach phonetic sounds to a child who has already learned to read by another method, or as a refresher, especially for spelling, but they will not work to start from scratch in reading instruction. While many people have blamed Dr Seuss for the death of phonics, nothing could be further from the truth and many of his books are wonderful for children who are starting to read with phonics.
Below are links to my reviews on several phonics resources, as well as the Maire Mullarney books:
HOOKED ON PHONICS
DR SEUSS AND PHONICS - THE CAT IN THE HAT
USING DR SEUSS TO TEACH PHONICS - HOP ON POP
ANYTHING SCHOOL CAN DO YOU CAN DO BETTER