Some virtualization products (like MS Virtual Server and VMware Server) support two types of virtual hard drives – fixed & dynamic. What is the difference between these two types of virtual hard drives?
With both fixed and dynamic virtual hard drives, you set a maximum size that the virtual hard drive will appear to the guest virtual machine. What is different is that, with the fixed disk, the size of the disk is allocated when it is created. Thus, if you create a 100GB fixed virtual disk, 100GB in space is taken up on the host system when you create that disk.
On the other hand, when you create a dynamic virtual disk, only a tiny amount of space is taken up when you create the disk. Over time, as the amount of space used in the dynamic virtual disk is increased, the amount of real disk used on the host is increased.
While a dynamic disk is better as it uses less real space on the host disk, it is also not as preferential for performance as a dynamic virtual disk easily gets fragmented.