There are 2 general types of microphones in the market today. They are 1) Dynamic microphones and 2) Condenser microphones.
There are a few other types like piezo, electret, etc... but we'll discuss those later. For now, let's talk about these two.
How are they different? Which one is better?

First, let's talk about dynamic mics. Dynamic microphones are "mechanical" in nature. No, I don't mean they have gears in them but mechanical movement of the microphone diagphragm causes a small voltage to be induced. Basically, sound waves travelling and causes a moving coil to vibrate in and out of a magnetic field. When this happens, a very small and minute amount of voltage is created. If you amplify this small voltage (using a mic preamp or mixer), you'd hear the original sound.
Does this sound familiar to you? I hope so. Because the same principle works in REVERSE when we're talking about speakers. With speakers, current applied to the coil causes it to vibrate, which produces sound waves which eventually reaches your ear. So think of dynamic mics as very small speakers wired in reverse.
Because of the way they operate, dynamic mics don't need an external source of power like a battery or phantom power supplied by your mixer/preamp.
Also, the voltage generated tend to be on the small side and requires more amplification by your mixer/preamp. Of course, with more amplification and higher gain settings by your mixer or preamp, comes more "noise" because your preamp is going to amplify both the original signal and any noise in the system.
Also, they tend to be less sensitive to sound because it requires a good amount of sound energy to move that diagphragm to cause sufficient vibration to generate an output voltage (or signal).
Some examples of
dynamic mics are the Shure SM57, SM58.
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Shure SM58 Dynamic Handheld Microphone
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Consistently the first choice of performers around the globe, the SM58
vocal microphone is a genuine world standard and a true audio legend.
The Shure SM58 is a unidirectional (cardioid) dynamic vocal microphone
designed for professional vocal use in sound reinforcement and studio
recording. Read
Reviews...
List Price: $188
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Condenser microphones on the other hand work on the principle of capacitance. "Condenser" is another word for capacitors back in the olden days of vacuum tubes. So anyway, a capacitor has 2 plates and it's capacitance is dependent on several factors like area of plates, distance between plates, and dielectric used. Anyways, for this discussion, one of the plate is made to vibrate by sound waves. This effectively varies the capacitance of the condenser diagphragm.
This varying capacitance is proportional to the displacement of the plate, which is proportional to the strength of the sound waves. Current flows through the wire when the distance between the plates change (caused by the sound vibrations). This is a very small current that must be amplified before it even goes to your mixer/preamp. So yes, condenser microphones have little preamplifiers inside them.
Also, unlike dynamic microphones... condenser mics require power to operate. This may come in the form of a battery housed inside the mic unit, or via the microphone cables through the XLR jack, supplied by the mixer/preamp. This is called phantom power. Basically it's 48Volts supplied by the preamp to the mic.
Condenser microphones are very, very sensitive. It can pick up the sound of your breathing easily, or air coming out of an A/C duct, or the fan noise in your computer. So if your bedroom (ahem, recording studio) is very noisy... using a condenser microphone may leave you feeling frustrated as every sound will be captured by it.... even sounds/noise you don't like.
Here are some examples of
condenser-type microphones.
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Rode NT1A Studio Condenser Microphone
View more products from RODE
The Anniversary Model NT1-A is a complete redesign of the now legendary
NT1 classic studio microphone. From the new nickel-plated body to the
state-of-the-art surface mount electronic circuitry, the NT1-A will
leave you asking "how can RODE offer a microphone that sounds this
good, for so little money?" It takes advantage of the huge RODE
investment in advanced large scale manufacturing allowing premium
performance, durability, consistency, and construction at a price that
anyone can afford. Read
Reviews...
List Price: $349
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for Sale price
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So which type of mic is better? Condenser or Dynamic?
The answer is.... NEITHER.
There is no clear winner with regards to which mic is better performing. There are crappy dynamic mics that will get beaten by condenser mics and there are condenser mics that will get beaten by dynamic mics.
We talked above how condenser mics require power to operate in the form of a battery or phantom power. This requires that the mixer/preamp you picked/used can supply phantom power. Otherwise, your condenser mics will be useless. In this case, if you have a non-phantom power capable mixer/preamp, you're better off with a dynamic microphone.
But dynamic microphones can be heavy since it requires better shielding. (Remember, inside the mic are coils and magnets that generate electricity.) Dynamic mics are susceptible to stray magnetic fields which will cause noise to be generated in the mic. What do I mean by stray magnetic field? hmmm... like motors, ballast in flourescent lights, high-tension power lines, and things like that.
The thing is, there are excellent dynamic mics and there are excellent condenser mics. One should look at the bigger picture, and the required application when choosing a mic. You can't make a generalized statement that X is better than Y.