Hi Kathy,
It's a Cabinet Portrait - this was one of the standard sizes of portraiture which included the more familiar carte-de-visite. Normally Cabinet cards were 6 1/2 x 4 1/2 inches. They were common between the 1870s and the early 1900s. It could very well be your grandfather.
Painting over photographs to add colour was sometimes done by the photographer or by an artist specially hired for the job by them. But this job looks more - how shall we put it? - amateur
Maybe someone in the family did it? Normally you would get quite transparent colours added over the photograph, these are quite opaque.
The train and toy are probably props used by the photographer, he would have had a studio if he was producing things like cabinet cards. The brick wall may be real or may be a backdrop. I have no idea what's going on with the baby though! Often small children were tied to chairs with a sash round the waist or something, to stop them wriggling too much - in this case he looks like he's hanging from a hook in the wall!!
The photograph itself is an albumen print and if not protected from light will fade considerably, as well as turn more yellow. Keep it out of the light if you can.
Prue
