Source:  http://en.wikipedia.org/wiki/Virtual_private_server

A virtual private server (VPS, also referred to as Virtual Dedicated Server or VDS) is a method of partitioning a physical server computer into multiple servers that each has the appearance and capabilities of running on its own dedicated machine. Each virtual server can run its own full-fledged operating system, and each server can be independently rebooted.

The practice of partitioning a single server so that it appears as multiple servers has long been common practice in mainframe computers, but has seen a resurgence lately with the development of virtualization software and technologies for other architectures.

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