The personal concern (hair, fingernails, etc) acts like a magnet drawing any curses or negative energy sent at the person, into the bottle first, rather than at the actual person. This is a form of sympathetic magic – the idea that something that was once part of a thing, still holds the ability to effect that original thing. Many moderns find this idea ridiculous, however, if you look up “quantum entanglement” you'll find that science has found it to be true!

Pins, sharp objects, or tangled string serve to break up the energy once it has entered the bottle. Iron is anathema to magic in general (and as you've mentioned the fae folk don't like it, and this is the reason why), so the iron nails neutralize the remaining magic.

Thus is the curse foiled by the witch bottle!

It is believed to remain effective as long as the bottle is intact. An extremely powerful curse could break the bottle (when a protective item breaks, it is said to have “taken the hit for you” in folk magic parlance), and a new one would need to be made at that point. That is why some people will make a new witch bottle every year – just in case the old one has broken; though I suppose if you wanted to, you could dig up the old one each year and check on its status.

As I said, plenty of people still employ this effective charm for protection. A simple Google search on the topic brings up dozens of pages instructing one on how to make one.
http://www.google.ca/search?sourceid=chrome&ie=…

http://www.peopleofwalmart.com/

Lots of high strangeness in Walmart!!