OK, you asked a bunch of questions.
Lets start with how capacitive touch screens work. Read more here.
Capacitive touch screens work with anything that holds an electrical charge – including human skin. There are two main types of capacitive touch screens – surface and projective. Surface capacitive uses sensors at the corners and a thin evenly distributed film across the surface (as pictured above) whereas projective capacitive uses a grid of rows and columns with a separate chip for sensing.
So, a capacitive touch screens will work with your styles and your finger and many other things, like.... your battery.
This leads to your second question: shouldnt the outside of the battery be non-conductive? To put it simply, a battery HAS to be conductive or it wouldnt be a battery. Now, only the ends are conductive, otherwise the battery would just short out. Since the ends are made out of metal, which can hold a conductive charge... see where I am going? That is why the battery works as a stylus.
So you taped the battery to the end of your stylus and it didnt help. Why? More than likely you "confused" touchscreen. Both the battery and the stylus (which has a conductive material inside it) were interacting with the screen and the chip controlling the touchscreen had issues dealing with the input.
If your stylus isnt working as well as you would like, go to a computer or office supply store, or online of course. They often have replacement styluses for different products that might work for you.