Yes, a practice stitch out is exactly that. Stitch the whole design on a piece of fabric similar to the one you are going to use. When you first get your machine, this is a great way to get familar with how it operates. After you have some experience, you don't have to do this as much. You DO want to do a test stitch out when you purchase an embroidery from a site that is new to you. Different digitizers have different levels of expertise. There are some that just scan a picture in and use an auto fill program to do the design, and some that 'manually punch' their designs. This means that they have placed every stitch by hand, which stitch out a whole lot nicer. Also, if you are going to embroider on fabric that you've never used before, or a new stablizer it's a good practice. What many people do is to purchase several yards of a neutral cotton. When you do a test stitch out, do it on a square, about 8-10'. When you have accumulated enough, just add sashing and you have a quick donation quilt!
If you are planning on embroidering on terry cloth, T shirts and/or sweatshirts, I would also recommend getting a few practice items from a thrift store. These fabrics require special treatment and it's much less stressful if you ruin something that was only a couple bucks!
ETA: here's a link to the embroidery machine post on this board:
http://www.quiltingboard.com/main-f1...un-t32969.html