Do I want to create a "Virtural Directory" or a "Site"?

What the difference?

A virtual directory is a web directory that you can create that points to a folder not located under the site root.

You want to create a site first and if you need a directory outside of that site to be accessable from the web, you would then create a Virtual Directory under that site.

So if I created a site on the C: drive I could created a virtural directory off that site that pointed to a dir on the D: drive and when I am under the actual site I will see the virtural dir?

Yes

I AM THE SMARTEST MAN ALIVE!!!!

Not the best idea to create web sites in IIS on the C: drive unless your are 100% sure your permissions are totally correct and your IIS setup is secure.

I always partition or install a second drive and map wwwroot to the other drive.

Yes that is how I am doing it but just used C and D for illustration.