Once again: iTunes Match looks at all the songs in your iTunes library.
When it sees that it is a song purchased from the iTunes store, it just remembers that it is a purchased song.
If it looks at a song and finds that it is one that is available on the iTunes store, then the song is "matched", and iTunes match remembers that.
If it looks at a song and can't find a match on the iTunes store, it uploads the song from your computer to the cloud.
So in the cloud you have now: Purchased songs, matched songs, and uploaded songs.
If you use another device (computer with iTunes, iPad, iPhone) with the same Apple ID, then all the songs in the cloud will be displayed. When you play a song, it gets downloaded. Purchased songs and matched songs are downloaded in 256 KBit AAC quality, uploaded songs are downloaded as they were on your computer.
On your original computer, you can delete matched and purchased files and then download them from the cloud. You would do that if you have music in less than 256 KBit or with DRM. Be careful: When you delete a song from your library, you will be asked if you want to move it to the trash (answer: YES) and if you want to remove it from iTunes Match (answer: NOOOOOOO unless you really absolutely want to get rid of it).
When you stop using iTunes Match, everything that is on your devices stays there unchanged, you just can't download from the cloud anymore.
iTunes Match isn't perfect. Make a backup of everything before you start it. And be patient, it takes a while. It also uploads all your artwork, so initially it will probably say "3000 items to upload". Don't worry.
ChesterM's is an understandable suspicion, since the collection that nemaslov claims to have (120,000 tracks) would likely have cost at least $10,000 if bought at today's retail prices. In an earlier post, though, nemaslov plausibly explained how his collection became so large:
"I'm in my 50s and worked in the record biz many years ago. Bought tons of LPs then CDs and received lots of promo CDs. Collecting for 30 or 40 years gives you a huge collection that many of us are now importing digitally."
At a very early stage of the iTunes Store, when they had sold about 5 million songs, Apple said that _one_ person had purchased over 36,000 songs.