Does llPreloadSound() work and if it does,

Does it preload the sound clip into the client cache so it is available for all scripts calling for it or does the llPreloadSound() only make it available for the script that pre-loaded it?

If it doesn't work, can I do the equivalent by llPlaySound("XXyyy",0.0) so it doesn't play but had to load? And is this available for other scripts calling for "XXyyy"?

It will preload the sound into the client for all script in that object. If sound is called by UUID then it will load sound for any object/script using that uuid.

Now for the better question. Does the preload work for people who arrive after the preload command has executed issued? eg: preload is dont once on_rez or state_entry.

Does it have to be done on a timer event for newly arrived avatars? If it has to be done on a timer, does this create lag for people who have already preloaded it?

has to be done on a timer.
and nope. won't cause lag for those who already have it cached as SL won't reload it for those.