There are many occasions when you might like to have multiple iTunes Libraries. You may, for example, like to keep separate libraries if you have multiple users on the same computer and don't want to have to sift through all of their media to find your own. Likewise you may want to create a new library to test a DiskAid transfer from a particularly old and dusty iPod Classic, or to transfer from a friends iPod who has particularly bad taste in music. Whatever the case, multiple libraries are easy to set up and manage, and ultimately act as though they were separate iTunes on separate computers.
Creating a second library
To create a new iTunes library, quit iTunes (if it is already running) and hold alt/option (Mac) or shift (PC) while relaunching. This will open a dialogue from which you choose "Create Library..." and then name your new library, and confirm by clicking "Save"
This will create and open your brand new instance of iTunes. It will be completely empty until you populate it with new media.
Adding media to your new library
You can do this by a number of methods. The first is the big "Scan for Media" button in the middle of the main window. This will scan your computer for all available media and import it.
Alternatively you could open the location where your libraries are stored, select a different library, and either drag and drop the whole "iTunes Media" folder or just the "Music", "Podcasts", or an other appropriate sub folder. You could even just select specific artists folders from within the "Music" folder.
And there you have it! A new iTunes library, ready for you to add your own media and be modified independently from the other/s. iTunes will reopen the most recently opened library each time by default and also log in with the last used Apple ID. So if there are multiple users, make sure you switch to your library and account when you open iTunes, so that you don't accidentally damage someone else's media.
Switching to another library
To switch to another iTunes library, all you need to do is quit iTunes (if it is already running) and hold alt/option (Mac) or shift (PC) while relaunching. This will open the same dialogue as before for creating a new library (see above). This time choose "Choose Library..." and navigate to the location of your various iTunes libraries. Their default is nestled within "Music" on a Mac, or "My Music" on a PC. Select your library then click "Open" and away you go.