You should look over the documentation on the Windows Home Server
support page, particularly the Reviewer's Guide and the Getting started guide. I think you'll find that many questions you haven't yet thought to ask will be answered.
For this one, choosing to increase storage capacity does what you suggest. Using the disk as a WHS backup drive will allow you to copy some or all of your shares to an external drive and take that drive off-site, giving you a copy of your shares in a different location.
I'm not on the WHS team, I just post a lot. :)