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A VPS runs its own copy of an operating system (OS), and customers may have superuser-level access to that operating system instance, so they can install almost any software that runs on that OS. For many purposes they are functionally equivalent to a dedicated physical server, and being software-defined, are able to be much more easily created and configured. They are priced much lower than an equivalent physical server. However, as they share the underlying physical hardware with other VPSes, performance may be lower, depending on the workload of any other executing virtual machines.
In answering this question, maybe it’s better to examine how VPS hosting fits in to the overall offerings of most hosting companies. Shared hosting is just that – your site is hosted on a machine with a bunch of other sites, and each of you share the same resources, including RAM, disk space, and CPU. Your site uses what it needs if it’s available, and if it’s not – well, that’s the limitation of shared hosting. Likewise, a dedicated server is also self-explanatory – your site is the only one hosted on server, and you have all the aforementioned resources available at your beck and call. Dedicated hosting is therefore for those large sites with big databases and lots of traffic, whereas the limitations of shared hosting’s usually prevent it from housing that kind of site. Dedicated servers are also relatively expensive, while one can get a shared hosting plan for under $10 per month.