It's almost as simple as you say. For my money I would leave the old drive in place when you put the new drive in. Then you can easily copy over your data onto the new drive after you've installed Windows on it.
If you do this, you'll probably need to change the jumper on your existing drive so that it's the "slave" (there should be a diagram on a sticker on the drive to show you how to do this), and set the jumper on the new drive to "master".
There should already be a spare plug on the ribbon cable in your PC for the second drive, and also one or more spare power plugs.
Hopefully someone else will be able to set you straight on the different types of drives. Generally speaking, I would go for the biggest your budget can stand.