How do virtual dedicated servers work?

About virtual dedicated servers

A virtual dedicated server is a server that exists in a virtual form on a physical computer. This is achieved via specialized virtualization software, such as Microsoft’s Virtual Server technology, and allows there to be many virtual servers running at the same time on one physical computer. These servers are self-contained in very large files, which the virtual server software knows how to run.

To a user, they look and act exactly like a physical server, which allows web hosts to sell dedicated server space to many users, and contain them all on one physical box. With enough RAM and processor speed, there is no performance impact, and a web host is able to sell many dedicated servers while maintaining fewer physical computers.