A very basic way to get the idea of virtual hard disks is to remember that two computers cannot share the same physical hard drive. So, they are essential for virtual computers to work, as two machines cannot share the same low level access hard drives - they need their own.
A physical host computer will only be able to access any guest OS's virtual hard drives through network, just like another computer on the LAN, even though that virtual hard disk resides on one of its own physical drives.
There are no performance advantages, as they can never be faster than the physical disks they are on. An advantage that they do have is that they are portable, being easy to transfer to another physical disk or machine.
.VHD is Microsoft's format for virtual drives and .VMDK is VMwares. It's quite easy to convert between different formats.
You can mount .VHDs in Windows 7 and Server 2008 R2 Disk Management, and you can even boot physical computers from .VHD disks, which I have been finding useful for old OS installations, and as a neater alternative to dual-booting.