A virtual machine differs from a physical machine in that it operates as a simulated environment emulating the hardware of an actual computer. Virtual machines run on a host system but behave like a standalone computer, capable of running an entire operating system and applications. This design allows multiple virtual machines to coexist on a single physical server, optimizing resource use and providing easier scalability. VMs also enhance isolation and security by separating applications, making them beneficial for testing and cloud computing environments.