Lately I've seen dozens of artists who digitally paint entire drawing solely in grayscale and then they color it somehow without erasing the grayscale part.
At first I thought it's by making a new layer on top of it with "Color" property and simply painting over as some artists even said that it's how they did it. However, I am puzzled on how exactly this works. For example, I tried to paint a skin tone with this technique on a grayscale face, but no matter what skintone color I choose it always paints the same light-orange color and it looks like I am using a colored dodge tool instead.

Anyone can enlighten me?

(I use CS3 but I am very familiar with Painter as well, so you can explain for any of these).