I have been seeing this form of advertising all over the internet, but haven't really understood how it works, I see testimonials of people who have become millionaires as a result of using this strategy but I still don't know how it works.

Read this to understand better -

AdWords - Wikipedia, the free encyclopedia

__________________
My Personal Blog
Codematics Technologies Pvt. Ltd.
Best Web Hosting Companies

Google AdWords inserts your ads in accordance to your keywords automatically when a person searches for keywords that relate or match your keywords.

It's easy and automatic, though there's a lot of competition.
__________________
Cheap Game Gold
Online Gaming Services - Sell Game Account
Game King

How does it actually pay? Does it pay just for displaying the ads, or just when someone clicks through on one? I appreciate that it's peanuts however, but every little ads up I suppose!

I am likewise interested in this query.

I always understood AdWords was PPC only, and doesn't have a CPM system alternate.

Adwords generally is cheap clicks. You only pay if someone clicks your ad. In order to be effective, you want a good amount of impressions and clicks per day. Usually, a newbie will start off small. Say you started out at $100 per month for your campaign. That will equal out to a $3.33 budget per day. At .40 cents a click, that is about 8 clicks that you can afford. Now if nobody clicks, then you don't lose anything.

The way you make money is by your affiliate program that you use. If the person converts with the offer, and it pays you $20, and you spend $5 in adwords that day, then you profited $15 that day.

If at anytime you get scared, you can pause your campaigns and not be obligated to pay anything. Generally we would pause a campaign that isn't performing while we find something to swap it out with. Or you could be direct linking, and pause to go create a landing page.