Outboard Compression & Dynamics in Your Home Recordings
Recording your tracks can sometimes be difficult, especially when trying to record music that has a wide dynamic range. Perhaps, for example, the verses of a song you are recording are quite soft, but the chorus is louder and packs more of a punch. Maybe the song starts with a clean guitar tone, and then switches to an overdriven tone as the song builds.
Music is inherently dynamic. Some parts are meant to be soft, delicate or to be approached with a lighter or softer footprint. Other parts may try to convey a different emotion and will be louder, fuller, or more "in your face". The song Nothing to Lose by the rock band Billy Talent is a great example of a well-written song with a wide dynamic range. The song starts off quite low-key and moderately mellow, detailing the life of a troubled high-school kid who doesn't fit in. Once we hit the second chorus, we start to feel the tension growing and the emotion building. The main character has had enough. By the end of the song, you can really feel the raw emotion and passion as the character take his own life. What starts off as a moderately mellow track, ends as a full-blown rock song.
So how were the recording engineers able to capture both the quiet parts of the song, as well as the loud and more aggressive parts? Lets have a look at the overall wave-pattern of the recorded track:

Obviously, this is a heavily-produced track that was recorded, mixed and mastered by professionals in a top-end recording studio. But as you can see, the overall volume of the track is quite consistent, even though the dynamic range heard throughout the track is varies quite a bit. On first glance, it would appear that the track is clipping, but rather the producers have used a number of studio/mastering tools (adaptive limiters, compressors etc.) to maximise the track's volume to the point just before clipping.
Have a listen specifically to the vocals. The softer singing at the beginning of the song is a lot quieter than the screaming parts at the end of the song. But how did they capture this huge spike in volume without clipping the tracks?
This is where outboard compression comes into play.
You may have experienced this situation: You dial in the gain levels and then go on to record the perfect take, only then to realise you've clipped the input or there is distortion in the track. Your gain levels might've been set perfectly to capture the softer vocals for the verses and bridge of your song, but as your vocals get louder and more powerful for the chorus, you're clipping your track. Adding a compressor between your microphone/input source and the recording interface is a standard technique used in studios around the globe to help combat this issue and to make tracks sound better. An outboard compressor is commonly used in-line while recording vocal tracks, guitar, bass, drums and horns, to help polish the signal before it hits the recording interface.

The Universal Audio 1176LN is an industry standard, but will set you back a small fortune. There are much more affordable options that can deliver top-quality results, such as the ART Pro VLA II.
A compressor quite literally "compresses" the signal and delivers it to your recording software at a much more consistent and uniform level. Compression basically takes the loud parts and lowers the volume. It also will take the very quiet parts and will increase the volume. Having an outboard compressor (when it's dialed in correctly) is sort of like having someone adjusting the volume knob as you record your tracks.
But why not just use the compressors built in to the software I use? Won't that work exactly the same?
Yes and no. Software compression is a great tool to use especially when it comes to mixing and mastering. You can use software compression to enhance your recordings, but it's adding compression to a signal that has already been recorded. Software compression will not eliminate clipping, nor will it help to polish the audio signal before it hits the recording interface.

By adding an outboard compressor "in line", like in the illustration above, you will be compressing the signal before it hits the recording interface preamps. This means, that the signal delivered to the interface will be at a much more consistent level, and should help you to avoid clipping. At the same time, it will help you to bring up the volume of the quieter sections and will make your track sound much more consistent.
One word of caution: with this method, you won't be able to adjust the level of compression after you've recorded a track, as you are adding the compression into the signal chain. Therefore, it is imperative that you set the compression levels correctly before you start recording. Add too much compression and your recordings will sound "boxy" and unnatural.
So should I buy an outboard compressor?

If you're setting up a home studio and you can afford to take the plunge, it's definitely worth the investment. If you frequently struggle with clipping issues, or simply want cleaner & more professional-sounding recordings, an outboard compressor will smooth out your tracks and make them sound much more polished. Compression is definitely more of a subtle effect, yet will give your tracks more of that "professional studio sound". It will take some time to learn how to best use a compressor and how to set it depending on what you're trying to record, but overall you can expect cleaner tracks that fit better in your mixes.
On the other hand, you can still get away with software compression if you're on a budget, but you will have to be much more mindful of clipping your tracks as you record. The quality of the plugins included in recording software these days is phenomenal. You can accomplish an awful lot these days using only software plugins, if of course you have the time and patience to learn how to effectively put them to use. At the end of the day, there's no substitute for the real deal, regardless of how good the plugins might be.
If you plan to do a lot of recording, especially if you're working with vocals, bass or acoustic drums, you definitely won't regret your decision buying an outboard compression unit. Take a look at the ART Pro VLA II, which is an outstanding 2-channel compressor. Also, take a look at the Klark Teknik 76-KT Classic FET-Style Compressor, which comes in a little cheaper but gets the job done and has great reviews.