Depending on the version of Word you're using, you can have different options at the bottom of the dialog. I would say off hand that you should just accept the default selections. However, I do think you should understand what you are accepting. Here's a run down of what I know/think about each of the options.
Add to template
Click this option when you are creating or altering a style that is associated with a template. As I've said in the past, every document in Word starts with a copy of a template. It may be the Normal.dot template (Notice the .dot or .dotx extension) but it is a template none the less. Later, we are going to create a template. Right now you just need to know that the check box is here and that you can add a style to a template on the fly using this box.
Another option is to create a document (.doc or .docx) and the save your document as a template. If you use this method, you do your page layout, alter or create all of your styles, and then save the document as a template. Word adds it to your template gallary (when you click File, New, you arrive at the gallary) and you can pick it from the gallary to create documents. When you use this method, you don't use this Add to template check box at all.
In my opinion, checking Automatically update is akin to placing a voodoo curse...complete with snakes and dolls...on any document in which you use the style. My recommendation is to never select this option. If you have this option checked...and you forget about it...and you make one small change (for example, change the paragrah spacing to squeeze a paragraph onto the bottom of a page), Word does exactly what it's suppose to do. It changes every instance of the style; that is, every place you've applied the style. Now you can change the style back but you could also not check the option and avoid the pain.
Add to Quick Style list
This option is checked by default. You can leave it checked. It simply makes the style available in your current document.
Only in this document
This option is also checked by default. You can leave it checked. Most likely you'll use the Modify Style to do just what the style dialog says...modify a style.
New documents based on this template
This option is unchecked. Again, the assumption is that you are altering an existing style in an existing template.
We'll be clicking Format-->Font to see what more we can do with fonts...there's still lots we can do with fonts other than what you've seen in the Formatting group on the Modify Style.