Keyword match type determines how tightly you control when one of your ads are shown. For instance, if you pick the most liberal match type (broad match) and you select the keyword “red balloon” then you can’t get mad at Google if they show your ad to someone who types in “hot air balloon party on Mars.” OK, that might be an exaggeration, but only a little bit. Basically, broad match is used when you have a big budget and you want to get results very quickly by pulling in traffic from lots of places. You can then use tools like the “search query report” to see the actual queries that triggered your ad, and you can use conversion tracking to see which of those terms should be officially added to your account.
There are five match types: broad match, broad match modifier, phrase match, exact match, and negative match.
Whenever I run an AdWords audit, I usually start by looking at the match types, and seeing if irrelevant traffic has been entering the account. I once found an AdWords account that spent $20,000 on completely irrelevant traffic.