Storage water heaters are the most common type. Water is heated in an insulated tank. When the hot water tap is turned on, hot water moves out of the top of the water heater and cold water flows into the bottom of the tank to replace the hot water going out the top of the tank.

Source: UF/IFAS Energy Efficient Homes: Water Heaters; Wendell A. Porter, Hyun-Jeong Lee, and Kathleen C. Ruppert, 2008.

Additional Resources
UF IFAS Energy Efficient Homes: Water Heaters

EnergyStar®