3M is the most common wet-sanding paper, and yes, it's black, the finer grits are gray. I have always just used a bucket or tray and keep dipping the paper in the water. You want to be sanding on a water film, it lubricates the surface and keeps the dust from plugging up the paper. I have never heard of soap, but I imagine that would also cut the viscosity and make the water flow better.
400-600 grit is normal for taking a lot of material off, like for orange-peeled spray, or to take down a repair that's considerably higher than the surrounding surface. However, it is relatively easy to sand right through your gel coat so watch out there.
Thousand grit or 1200 is used for final sanding before polishing. I use a wool wheel, but state of the art is now with the new foam polishing pads.
As mentioned, for swirl marks, polishing compound may be in order, then a swirl-mark remover polish - not wet-sanding! I have seen surfaces ruined from inexperienced finishers, paint burned off edges, and paint and gel coat gone right thru. The gel coat is only a few mils thick, albiet Grady's are considerable thicker than other brands.
If you burn through the gel coat you'll have a whole lot bigger project on your hands!