Hello Redpandafire, and welcome to Seven Forums.
Think of your desktop with a piece of graph paper on it layed out in grids the size of an icon.
The Align to grid option still allows the icons to be placed anywhere on the desktop you drop them, but only keeps the icons from overlapping each other by keep them alligned (in) only the grid closest to where the icon was placed. If your icons are already in their grid, then it will not move them. You will need to instead manually arrange the icons how you like them with only this option checked.
The Auto arrange icons option takes the above one step further by automatically arranging all of the icons to the right side of the primary desktop from top to bottom in the first row and on.
Hope this helps,