What is 'Virtual Memory', and how does it work?

Virtual memory is the practice of moving information from RAM to secondary storage (eg the hard disk). It allows computers to make use of more memory than they have installed.
When space in the RAM is running out, the memory manager on the CPU locates the page (or pages) of memory that was used least recently, and moves it to disk. This in turn frees up space in the RAM for any new data that needs to be put there.