There are only three ways to get sound onto your recordings: via direct input (as from a guitar amp or synthesizer), MIDI (which isn't really sound per se, but instructions to a module that creates sound), and by microphone.
The blessing and curse of mics is that they all color sound to some degree, although the better ones (which are often more expensive but not always), hooked to a good preamp, really give you that you-are-there feeling.
Dragon's Quick Guide to Mics
OK, here are the basics (and all you experts can stop laughing now, this is intended to help most people with most of their questions).
Types: There are basically two kinds of microphone technology, dynamic and condenser:
Dynamic mics are actually backwards speakers and generate a small amount of electricity when the diaphragm of the mic moves back and forth under the pressure of the sound waves hitting it.
Condenser mics are powered or biased by electricity and so are more sensitive; they use a more lightweight diaphragm and are better at picking up nuances of sound. "Large diaphragm" condenser mics are more sensitive and more expensive than "small diaphragm" types.
Pickup Patterns: this isn't what you get when you drive your truck in circles in the snow, but refers to the relative sensitivity of a microphone to sounds coming from the side. A pickup pattern can be:
Exotica: Ribbon mics, tube mics, and most other technologies are probably way out of your budget anyway...except for the PZM (Pressure Zone Microphone), which is patented by Crown and was used by Radio Shack for many years. The current Radio Shack mic is not considered to be much good, but if you can find one of the older ones, here's how to modify it for serious recording use.
Plugs: everyone is used to teeny little 1/8" plugs found on consumer mics and 1/4" plugs found on guitar cables. Forget all that. Real mics have XLR plugs and balanced cables, which have the following characteristics:
You can't generally just plug a mic with an XLR cable into a 1/4" jack on a 4-track or mixer, even with a properly wired adapter. That's because the mic will almost certainly have a lower impedance than the input of what you're plugging it into, and that means that unless you correct things with an impedance matching transformer, it will sound like junk. Fortunately these things are available for less than $15 at Radio Shack (you want #274-016), and adapt the XLR plug to 1/4" at the same time.
This is another reason that most people's second multitrack recorder generally has direct XLR inputs...they already know how useful they are!
The Secret of the Phantom: phantom power sounds very mysterious the first time you hear about it, but it's really simple. All condenser-type mics require a source of power. Most consumer mics get away with a little button cell for power, and if you look at a mic plug intended to plug into a computer sound card, you'll notice that it has an extra connector so the mic can get power from the sound card itself.
But this generally isn't enough for pro audio, so a way of sending DC voltage (up to 48 volts!) back down the mic cable was devised, which is enough to not only power mics but maybe also ring your bell, should you stick your finger in the wrong place at the right time. Phantom power shouldn't hurt a professional dynamic mic that has an XLR fitting on it, either, contrary to some popular opinion.
Good mixers (and some of the better multitrack recorders) supply phantom power (sometimes on only a limited number of their inputs, so make sure you know what's going on). And almost all pro condenser mics need phantom power (with the notable exception of the amazing AKG C1000S, which can be powered by an ordinary 9 volt battery).
Which Mic Should I Buy?
Everyone has their favorites, but there are some classics. Warning: once you hear a good condenser mic, your budget may never recover. You can do a lot with a bunch of 57s and 58s...
Shure 58: probably the best-known dynamic microphone in the entire world, the "ball" 58 is popular as a vocal mic because (a) it's virtually indestructible (b) if you get real close to it, it accentuates bass frequencies and thus is great for vocalists with weak delivery.
Shure 57: the big secret about the 57 is that electrically, it's exactly the same as the 58. The only difference is that it doesn't have the bass proximity effect because of a different windscreen design. That's why it's used for micing amplifiers, drums, and some instruments as well as vocals.
AKG C1000S: the most popular truly affordable small condenser mic, especially since the price just went down. Great on instruments, and can take high SPL (sound pressure levels, a.k.a. loud music) so can also be used on amps (see the home page for this mic).
Neumann M147: you know tube guitar amps? This is a tube mic. Don't ask how much it costs, just don't drool all over it. Oh, by the way, Neumann invented phantom powering, in case you're interested...