As you rightly suspected, this is a huge topic. One thing I would advise against is making adjustments by the seat of the pants. Until you understand the principles invovled and get yourself in the ballpark, I wouldn't touch a screwdriver. I'll try to give you a very basic picture of how suspension works and then regardless of whether it was helpful or not you should find some more info on this either in a bookstore, a Doc Wong or some other class, or some other good source (there's plenty of good info on the web, but a lot of it doesn't tell you the basics).
Controrary to what I used to think, the job of suspension on a motorcycle is not give you a comfy ride (maybe on a Nighthawk). The single most important reason for having moving suspension components is to keep the tires in contact with the road whenever possible and in such a way that provides the best traction. There are 3 main things that accomplish this: the spring, compression damping, and rebound damping.
The spring provides force resisting gravity and thereby holds the motorcycle up off the ground. In a sporting motorcycle, engineers look for the most even action against gravity across the entire suspension travel. That means, ideal springs would give you the same resistance at maximum compression as well as when fully extended. That is of course not possible, if are familiar with F = kx equasion. If you're not, don't worry about. Suffice it to say that in modern suspension designs, engineers try to achieve a large ratio of suspension travel to spring movement -- the wheels go up and down, but the springs move very little. In motorcycles, this is very obviously achieved in the rear and BMW and some very innovative people try to do it in the front through the use of telelever suspension designs and the like. One other important thing you should know about springs is that the force they exert is not depndent on where the suspension is moving at that particular time.
Compression damping is a force proportional to the speed of suspension movement in line with gravity. This force counteracts gravity, just as springs do, hence compression damping assists springs, but only when suspension is compressing. Think of what happens when you push on the seat of your motorcycle down -- it sags. But it doesn't go down as fast as it would have without compression damping. You may try an experiment: balance your bike straight without sitting on it. Then sit on it slowly. Note the rate of descent. Get off the seat again and then instantly drop all your body weight on the seat, slamming yourself down on it. You will notice that the rate doesn't change much. That's because the faster you try to compress the suspension, the more the compression damping fights it.
Rebound damping is a force similar to compression damping, except it assists gravity, rather than the springs. If you think of the principles mentioned in the preceeding paragraph, reverse the direction of the damping forces and you get rebound damping.
The job of these three things is to help the springs be roughly in their optimum compression state so they would be ready both for compression (bumps) and rebound (potholes). When do you need suspension the most? -- in corners. By design, motorcycles compress their suspension when they are leaned over. Therefore suspension has to be tuned for the typical use of the motorcycle. If it's a racebike, the suspension has to be tuned primarily for full-lean, which would feel very harsh and unstable on a leisurely commute to work around town.
How is it tuned? There are 4 main things one can change on a fully adjustable suspension:
Ride height doesn't directly affect what the springs or the dampers actually do, but its settings affect overall motorcycle geometry, which in turn affects weight distribution and therefore the other settings.
If you lifted the bike off the ground and let the suspension fully extend, the springs themselves are still partially compressed. The amount by which they are compressed, or rather their length when suspension is extended is called installed length and the amount by which that length deviates from the spring's natural length is preload. For any given spring, installed length and preload are talking about the same thing.
Knowing preload by itself is useless. That number is normally used just for spec sheet purposes. What is really helpful to know is static sag. Static sag is the difference between fully extended suspension and when the rider is on the motorcycle in his/her normal riding position with full gear. Obviously the suspension will compress somewhat when you sit on the bike and the amount by which it compresses is what static sag indicates. This is perhaps the most critical setting and if you get it right after being satisfied with chassis geometry (ride height), it puts you in the ballpark and you can start tweaking other settings from there. It is actually much more difficult to set static sag for a street bike than it is for a race bike. The reason is that on a race bike, you always know how much gas will be at the start of the race, what gear you're wearing and the bike never carries anything other than the rider and gas, so that's all you really need. What you ideally want to see then, is when the suspension is taxed the most (full lean), it is roughly half-way into its travel. The more preload you give it, the shallower into its travel the suspension will go (the stiffer it is). That's why race bikes tend to have much stiffer suspension settings -- they have to fight much higher forces midcorner and not compress too much.
Once you have preload set, imagine what would happen if you didn't have damping at all. The first bump you hit, the bike would wallow and pogo. The suspension would keep bouncing up and down almost indefinitely. That's basically what damping does -- it controls the movement of the suspension. Think of damping as forces that slow down that movement. The more compression damping you have, the slower the suspension will compress. The more rebound damping you have, the slower it will extend. Obviously the two have to work in unison, but they can be adjusted separately on most modern sportbikes.
Finding good damping settings can be a bit of a mystery, especially if you're just starting out at this. Generally, you would start with rebound damping. This can be done by turning rebound damping to the minimum setting, balancing the motorcycle, pushing on the end in question and seeing how quickly it goes up. Chances are, the suspension will immediately bounce right back, overshoot, and then settle back down. When that happens, turn rebound damping up by about 2 positions (clicks, notches, whatever) and try again. You may or may not see much change. Keep doing so until you start to see the suspension not overshoot as much or not at all. At that point, find the lowest possible setting where the suspension comes up and settles without going back down. Presto -- you've got your rebound setting.
Now you can set compression. Some motorcycles only have rebound damping settings on the forks. That doesn't mean there's no compression damping -- there is -- you just can't adjust it. But just because you can't adjust it with a little screw or a dial, that doesn't mean you can't change it at all. In that situation, you can change the fork oil to that with a different viscocity. The more viscious it is, the more compression damping you'll have. The only problem is that when you change your fork oil viscocity, that throws your rebound damping setting out the window, because it is just as dependent on the fork oil as the compression damping, so you'll have to redo your rebound damping then.
Generally speaking, you can judge how well your compression damping works by how quickly your suspension compresses under braking and turning. This is not the most critical thing on the street, so for a street bike, I would just go with the suspension maker's recommendation for your weight and riding style.
I would like to reiterate that this text is nowhere near comprehensive when you talk about suspension. There are plenty of things that complicate the topic such as: