Virtual Hard Disks 

This video looks at the virtual hard disk format (VHD and VHDX) used by Windows. What it can achieve and what you need in order to use it.
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Virtual Hard Disk (VHD)
A virtual hard disk is essentially the data that would normally be stored on a physical drive stored in a file. When a virtual machine is created, virtual devices are created. For example, virtual devices may be created for the CPU, memory and hard disk. The virtual hard disk is connected to the VHD file and thus any data that is written to the virtual hard disk will be written to the virtual hard disk file. Since a virtual hard disk is being used by the virtual machine, this means that the virtual machine can have additional features added that are not possible when using a physical drive. For example, if you wanted to save the state of the virtual hard disk, this could be stored and restored later on. This is referred to in virtual machines as a checkpoint or a snapshot.
Virtual Hard Disks Explained
When you install an operating system in a virtual machine, the operating system sees virtual hardware. Like physical hardware, the operating system needs device drivers in order to access this virtual hardware. The operating system will communicate with the device driver just like it would to access physical hardware. Once the device driver communicates with the virtual hardware, the virtual solution is able to add additional features. For example, it is able add snapshots and dynamic disks. Dynamic disks is a feature that allows the virtual file to grow in size as data is added to it.
Virtual Hard Disk (VHD)
The virtual hard disk format was first obtained by Microsoft in 2003 when Microsoft purchased the company that developed it. It was used in Microsoft Virtual PC and then was continued to be used in other products like Hyper-V. Virtual hard disks support a number of different formats to store the data in. These includes, fixed, dynamic and differencing.
Fixed
The fixed file format used for virtual hard disks uses a virtual file that is the same size as the physical drive. Since the file is the same size, this offers excellent performance. This is because not much processing is needed in order to determine when the virtual hard disk needs to be accessed. The disadvantage with this is that fixed-size VHD files are slower to create than other virtual hard disk types. This is because in order to create the virtual hard disk file, a file needs to be created that is the same size as the physical hard disk.
Dynamic
Dynamic virtual disks use space only as required. When the dynamic disk is first created, this is a fast process as only the basic data structures are created in the file. As data is added to the dynamic disk, the dynamic disk increases in size. For example, if you store 20 gigabytes of data on a virtual hard disk, the virtual hard disk will be about 20 gigabytes in size. The cost of this is that there is reduced performance of the virtual hard disk. If you add and remove a lot of data, the virtual hard disk becomes fragmented. This reduces the performance of the virtual disk and also increases it size. In order for the virtual hard disk to work as well as it can, the administrator can choose to compact the virtual disk. This rearranges that data on the virtual disk as well as frees up any unused space in the virtual disk and reduces the size of the virtual disk. It is recommended that the virtual hard disk be compacted when the operating system is first installed or if the virtual hard disk is being archived. For example, the virtual hard disk is been saved to removable media like optical media.
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References
“VHD (file format)” en.wikipedia.org/wiki/VHD_(fil...)
“MCTS 70-640 Configuring Windows Server 2008 Active Directory Second edition” pg
“Installing and Configuring Windows Server 2012 Exam Ref 70-410” pg
“Compacting dynamically expanding virtual hard disks” technet.microsoft.com/en-us/li...
“Hyper-V Virtual Hard Disk Format Overview” technet.microsoft.com/en-us/li...