Groups are a way to keep posts pseudo-private from the world with those only in-the-know. Any member of a group can invite others to the group.
When you select a group from the settings page it restricts all posts and replies to that context.
It's kind of like a party; if the word spreads too much just create another group and start all over.
By default (Custom location set to 'No'), where you are in the world will be automatically figured out. Sharing your location is always opt-in and anonymous. If you don't want to, you don't have to.
Optionally (Custom location set to 'Yes'), you can manually choose a location anywhere in the world and see what's happening there. If you do post manual mode, the location of your posting will actually be where your device physically is, not the custom location you chose.