Web hosting makes it possible for visitors to view your site's content when they type in your domain name. But a Web hosting service accomplishes much more than that. It can help keep your site up -- and running smoothly -- 24/7. This is especially important in the competitive ecommerce marketplace, where interrupted availability may cause you to lose not only sales but also customers who will leave your site after a negative experience and potentially never come back.
Second-level (or lower-level, depending on the established parent hierarchy) domain names are often created based on the name of a company (e.g., bbc.co.uk), product or service (e.g. hotmail.com). Below these levels, the next domain name component has been used to designate a particular host server. Therefore, ftp.example.com might be an FTP server, www.example.com would be a World Wide Web server, and mail.example.com could be an email server, each intended to perform only the implied function. Modern technology allows multiple physical servers with either different (cf. load balancing) or even identical addresses (cf. anycast) to serve a single hostname or domain name, or multiple domain names to be served by a single computer. The latter is very popular in Web hosting service centers, where service providers host the websites of many organizations on just a few servers.
The server where you bought the domain probably offers hosting services but usually at a cost. If you want to do it for free, have your domain redirected to whatever free web service you decide to use for your website. Remember, free sites are limited in the number of pages and can have a lot of ads. On the other hand, hosting your own website as in Method 2 above, or having your site hosted where you bought and keep the domain, allows you to pretty much create as many pages as you want, without any advertising you don't put up for yourself.
Unlike VPS hosting, which is limited by the physical server on which your website is hosted, cloud hosting allows you to use resources offered by multiple machines. For example, if you find that your website is lagging because of lack of bandwidth, you can increase the amount available to you. Often, you can make this change yourself via the host's control panel.