Yes, you should use the server VM. It uses a different heap structure and garbage collection settings. Also, consider tuning the VM with the additional -X options.
I'm not sure what you are trying to do, if you try java -server -version you should get the Hotspot server VM.
If not, check you distribution. The jre/bin directory should contain server and client subdirs. (or in my case, jre/lib/sparc for a Sun Solaris dist)