Each website on the World Wide Web is assigned a number or an address known as its IP or Internet Protocol Address. It identifies the site and tracks its location as well. Normally it is a 16 digit number or more precisely 32 bits. A site is identified and reached by the browser by its IP address. But the IP address of each site is not unique and multiple sites may have the same IP address. If more than one site has the same IP, it is called shared or virtual IP address. If a site has its own unique IP address, it is called dedicated or unique IP address. Let us see why and when it is necessary to have a dedicated IP assigned to a site.
IP address is just like your home address. With a shared IP, you share your IP address with the other sites hosted on the server. Normally shared hosting comes with a shared IP. Its disadvantage is that you have no control over the other sites sharing that IP. In case one of them spams or uses black hat SEO techniques or something of the sort, the IP address gets blacklisted and your site becomes its innocent victim as well. Moreover your site cannot be reached by just typing the IP address in the address bar of your browser. The browser does some additional work to reach the correct site in that case.
Using dedicated IP, you have the benefit of being approachable by your IP address which is unique to your domain. You can access your account by FTP even when your site is unreachable by its domain name due to DNS propagation or any other reason. Dedicated IP also yields arguably better SEO results as it ranks higher with respect to trust and spam cleanliness due to a standalone IP not associated with any misdemeanor.
The most important use of Dedicated IP comes in case of SSL Encryption and secure connection. Transmitting data on internet is not safe these days. So sometimes it becomes categorically indispensable to encrypt data before sending it to a remote server. This encryption is known as SSL or Secure Socket Layer. SSL is a cryptographic protocol that provides safe and secure communication over internet. Setting up SSL protection on your site requires your IP address which should be unique in every case for that. If your site is of the type where customers buy certain products or services using credit card or any other mode of payment, they must communicate over the layer of security provided by SSL.
It is to be kept in mind that there is a difference between dedicated hosting and dedicated IP. Dedicated hosting means your site is the sole consumer of the physical machine of the server your site is hosted upon. Similarly shared hosting and shared IP addresses are different things. You can have a dedicated IP address on a shared hosting as well as a dedicated hosting. The requirement and the need arises due to one of the factors mentioned above.