First off--if your piston is moving down at the point where Top Dead Center, or TDC appears, or prior to that, you REALLY need to replace your damper!
When something like this occurs, that means the damper outer ring has slipped, and there is no way, no how you are ever going to accurately know what the timing is.
Dampers aren't all that expensive, and they aren't all that hard to replace, either.
Do yourself a favor, and replace it--you'll be glad you did!
Secondly--Since your post asking about what a timing light is or does seems to indicate you're not very familiar or not familiar at all with ignition timing, here are a few basics:
Gasoline (or any fuel, for that matter) takes a certain amount of time to burn.
It's for this very reason that the spark plug is fired at a point prior to TDC (BEFORE TDC or BTDC), and that the faster the engine is spinning, the more prior to TDC the spark plug is fired; this is known as "ignition timing", and when the plug fires BTDC, it is known as "ignition advance".
If you fire your spark plug when the piston is at TDC, most of the fuel will still be burning as the piston is traveling downward; any point after that would be known as ATDC or AFTER TDC, and in this case, the "ignition timing" would be "retarded".
The way you want it set is so that the fuel burn provides the maximum amount of pressure on the top of the piston as it's making it's way down the cylinder; to that end, there are three types of ignition advance--initial advance, vacuum advance and mechanical or centrigual advance.
Vacuum and mechanical advance systems are used on older cars prior to the advent of the computer-controlled ignition system; they have either a combination of both vacuum and mechanical, or mechanical only.
The idea is to create an "advance curve" for the ignition advance that, when you combine all types together, reach a limit of a certain number of degrees BTDC when the spark plug fires so that the fuel will burn the most complete at each RPM range in the curve.
The "initial" advance is the number of degrees you set at idle, with no load and no other sources of advance (mechanical advance usually starts coming in at an RPM range just above idle, such as 1200 or 1500RPM), and so when we "set the timing" using a timing light, we are setting the initial timing.
Vacuum advance is used under part throttle and cruise conditions, and as the name indicates, it's actuated by vacuum; most vacuum advance systems are not adjustable, except for aftermarket vacuum advance cannisters, and in most cases, it's not necessary to change the settings used for this system.
Mechanical advance is built into each distributor that is not computer controlled, and uses weights and springs to rotoate the position of the "breaker plate" or the location of the rotor in relation to the location of the distributor shaft so that it places the leading edge of the rotor a few degrees ahead of where it was at idle, which essentially then "advances" the ignition timing. This system can be adjusted, and it's best done using purpose-built distributor machines.
In most cases, setting the timing or adjusting the curve isn't going to vary too much from the stock settings, other than perhaps a couple of degrees more and having full advance occur sooner (at a lower RPM range).
As has been previously indicated by other posters, you want to "stab" your distributor so that the rotor is pointing near the location of the number 1 spark plug tower, and the vacuum advance assembly is about halfway between as far clockwise it can go and as far counterclockwise it can go, but of course, you want the dampener to be at TDC or just a few degrees BTDC when you end up with the rotor at the final #1 spark plug terminal location.
