No one can lame your confusion, there is a steep learning curve when starting SL an the guides are very outdated for the most part. However you are in luck because there are plenty of people willing to help! I just started in April so I understand fully how you feel right now. I am sure someone more versed in guiding people will speak up but from my noob perspective here are some answers to your questions.
The new Avatars now start with a Mesh body, these bodies will not be compatible with anything other than mesh clothes, most of the noob area freebies you will see are the older clothes made for the older default bodies.
Here are some basics.....
Shape- when right clicking on yourself and choosing appearance, you can adjust the shape of your avatar. Ie how big your butt is, long your arms are, wide your forehead is etc. this works with the default old avatar bodies not sure about the new ones.
Skin- skin refers to the covering of your body and face. The pigmentation, and any cosmetics the skin creator put on it, the "look of the outside of you"
Mesh attachments- many people do not like the default avatars feet, hands, butts, or boobs so there are attachments you can purchase to change these things. The default Avatar shape is very angular, you can have smoother looking extremities that I listed by using mesh. That said, you already have a mesh body on right now but you can still swap out these parts if you wish. Think of them as add ons.
It gets a little more complicated because you can swap out eyes, hair, tattoo layers to change cosmetics or add overall body tattoos, bruises, anything you can think of.
In terms of compatibility most mesh attachments will work once you are able to adjust your body, for example I had to make my arms a bit meatier in order to look right with my Mesh hands.
If you feel overwhelmed don't give up. Reach out and I promise people will help you.. You can always IM me and I will try to walk you through making your look your own. Some great resources for me were the second life reddit and plurk because people constantly post to these forums so any information you will get will be up to date. Good luck on your journey!