Not to be rude, but it does exactly what it says it does. Unless you are on the site (see the user preference directly below this one), you will receive an email for each and every new post or topic unless the topic itself, or the category the topic is created in is muted.
It is applied to everything on the site, until you explicitly mute something. Watch is applied on a topic or category level, and is more controllable.
All categories, unless you mute the category.
From your first post:
Tracking will not send emails, as it does not create notifications. Assuming default user preferences, you will only receive emails if you receive a notification regarding the topic, which is only generated if you are @mentioned, quoted, replied to, or watching the topic.