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A virtual website is one which resides on the same physical Web server as other websites in order to optimally use computing resources such as CPU, RAM and bandwidth. This is done because most websites do not generate enough traffic and requests, hence using very little computing power, to warrant a full physical server. The websites that are being housed in the same server are virtualized so that more can be accommodated, hence the name. The act of hosting virtual websites is called virtual hosting or shared Web hosting, since many websites share the same physical server.
A virtual website resides in a virtual environment which it shares with many other virtual websites on a physical server. This means that the website is tied to software and not to the server hardware, which makes it easy to package and migrate to another server's virtual environment. This makes it easier to scale the website up in case the traffic grows by adding more virtual instances of the website (virtual server) or scale it down if the traffic is poor. This is now in the realm of cloud computing.
Most websites today are virtual websites since it makes more economic sense for both the host and the website owner to have it that way. Virtualizing websites allows the host to cater to many more customers who use only small amounts of resources, which means less hardware and lower maintenance costs; this is known as economies of scale. The more people who are paying for the same resource, the cheaper it is for everybody. But non-virtual websites are still being used, especially in corporate environments where they might maintain only a single large high-traffic site as opposed to multiple smaller sites like Web hosts do.
To be able to assign each website its own IP address, a process called IP aliasing is done which allows the host to accept requests for multiple IP addresses. The Domain Name System (DNS) is also configured to cater to virtual websites and IP aliasing. Amazon Web Services (AWS) is one of the biggest hosting entities that virtualize the Web servers that their customers use.