Well, first of all, it's not a "radial button" but a "radio button." The
terminology is taken from car radios, where when you punch the button for
one station preset, you eliminate others; radio buttons permit only one of
a group of choices, whereas check boxes are not mutually exclusive.
When you opt to create a new document, you are creating a .doc file. This is
an ordinary Word document and is what you want most of the time. If you
later decide you want to save that document as a template, you can do so by
choosing Document Template as the file type in the Save As dialog. If you
know from the outset that you want to create a template, you do gain some
advantages by starting with that selection. This automatically creates a
..dot file (which Word will, by default, save in the default directory for
document templates).
The purpose of a template is to serve as the basis of new documents. When
you click on the New button in Word or choose Blank Document in the New or
Templates dialog, you get a new document based on Normal.dot; other
special-purpose templates also ship with Word. When you create a document
based on a new template (as opposed to reusing an old document), you don't
have to remember to use Save As because the new document is created as
Document2 (or 3 or 4 or whatever), and the first time you hit Save, you get
the Save As dialog.
There are some things (though increasingly few) that can be saved in
templates but not in documents. AutoText entries are one example. Macros
used to be, but they can now be stored in documents as well. And it used to
be that you couldn't save a template as a document, but that distinction has
fallen by the wayside as well.
For more about what templates store (which will give you a better idea of
what templates are and do), see
http://word.mvps.org/FAQs/Customization/WhatTemplatesStore.htm