Virtualization is a method by which the actual hardware is hidden to a guest operating system and in its place, an abstract, emulated computing platform is provided.
In simple words, virtualization allows you to run two operating systems on your computer simultaneously. The actual operating system installed on your computer is known as the host operating system. You can have either Linux or Windows as the host operating system. On this host os, you have to install a virtual machine application which will emulate a computer and allow you to boot a second operating system inside it.
Various virtual machine applications are available today, some for free, others paid:
VMWare (Paid/Free) - VMWare Player is free, but it does not allow you to create your own Virtual Machines, only run them.
VMWare and VirtualBox can be run on a system where either Windows or Linux is the host operating system, while Parallels supports Windows or Mac OSX as the host operating system.
Either of these applications are installed on the host operating system, depending on the availability of the applications on that operating system. These applications then allow you to create virtual machines and define/configure the hardware characteristics of the virtual machine. Once the virtual machine is created, you can boot it from inside the application and load the Linux CD/DVD image or Windows CD to install inside the virtual machine.
The installation of the operating system inside the virtual machine will be exactly like a normal installation, but instead of seeing your computer's actual hardware, the installer will see the abstract hardware presented by the virtual machine application. The second operating system, known as the guest os, will be installed on a virtual disk which is created during the creation of the virtual machine itself.
Once installed, the virtual machine can be booted at any time. The guest os contained inside the virtual machine can then interoperate with the host os using features provided by the virtual machine application. Please refer to the documentation for your virtualization software for further information on its capabilities.