Virtual Machines are guest operating systems which are installed in a host operating system. Think of it as a secondary operating system in your computer, and you can run it at the same time with your operating system. The biggest function of virtual machines is the fact that they're isolated from the host (primary OS), which means they are in no means related.
The reason why everyone uses virtual machines is simply because you can have different operating systems on your computer without changing your preferred operating system. This comes handy for people who have programs which aren't compatible with Windows 7, people who need to use Linux...
