Wet sanding is typically done after the color coats have been applied. The process of wet sanding is to even out the color, remove any minor imperfections and prepare it for a nice smooth coat of clear. Wet sanding is done lightly so as to not rub thru the color coat and by using water, reduces the friction and heat buildup as well as material buildup in the sandpaper.
Wet sanding usually is done with very fine grits of paper-2000 and above while regular(dry)sanding can start with 320. Regular(dry) sanding is usually done as prep for primer, removing mold lines, and smoothing out any filler that may have been used on the model.
It is a trial and error process, just take your time and don't be afraid to ask questions. None of us were born with the skill, we all had to learn somehow!