QUOTE
How does the pen/knife tool work? Also, how exactly do layer masks work?
Ehhh I don't know knife tool at all, but I DO know some bits of the pen tool.
The pen tool lets say has 2 MAIN points, the starting point and the ending point of the line. Then if you click on the line between these two points you can drag to create some sort of curve, and if you click again somewhere along the line you can pull it to make another curve.
If you click somewhere OFF the line then it creates a new point and automatically connects a line from that point to somewhere else (i cant remember), i usually just stick with a starting and ending point and making some curvy lines.
There's only one way I use the pen tool though. Here's what I do with it, and it's visible in some of my sigs that I'll show below.
1. Create a curvy line the way I said above.
2. Click the brush tool. Select a small pixel brush like size 2 or 3.
3. Window > Brushes > Shape Dynamics > Set everything to a pretty low percentage.
4. Click back on the pen tool. (Must do this).
5. Right click on the pen line you drew and go to "Stroke Line".
6. Select Pen Pressure, then okay.
7. Right click on pen line and "Delete Path"
What you should be left with is a neat little lien that fades out at the ends. Here are pieces where I've used this technique so you can see some ways to implement it:
(Pen tool along the bottom in those curvy lines and that kinda go diagonally from bottom right to top left. I've gone to Blending Options and set a glow to give the line an additional glow.)

(My Theme Battle piece, from the Harry Potter wand I've done some pen tool lines, also adding an outer glow from the blending options.)

(The lines wrapping around the MC and the shadow of Ryoji)

(Lines in background are pen tool)

(Finally, the sig that everybody said was their favorite. Many of the lines in the background are the pen tool)

Hope that was semi helpful. It's a tool that you can't really make as the basis of your sig (at least the way I've used it), but its definitely a way to add some nice subtle effect effects