1 - The difference between the 500, 1000 and 1200 is the size of the grain - 500 being coarsest and 1200 being the finest.
2 - It can be thinned with regular lacquer thinners.
I have found this stuff great for filling in recessed ejector pin marks. Pick up a drop using a toothpick, apply to the middle of the recessed pin mark and if it doesn't cover the circle entirely, run the tip of the toothpick around the edge. If necessary, add more so that it forms a raised "dome" over the pin mark. Set it aside for a few hours to dry and then shave off the top using a chisel-edge knife blade. Finish by wet sanding with 800-1200 grit and you're done