Virtual Memeory is a page file that acts as RAM when your actual RAM density level (GB) isn't enough to handle all processes. For example, if you have three apps running, each requiring 1 GB, on a 2 GB system, you'd encounter the "Virtual Memory Low" warning message.
VM works in the same fashion that RAM does, in that it provides a temp read/write cache to the apps needed, until enough of your open apps are closed to stop the use of VM.
VM is different from RAM in that you don't physically install it. Rather, this is handled by the OS.