What is a Google "Penalty"?

A Google penalty is the negative impact on a website's search rankings based on updates to Google's search algorithms and/or manual review. The penalty can be an unfortunate by-product of an algorithm update or an intentional penalization for various black-hat SEO techniques.

Google penalty means your site dropping ranks. It usually happens when over optimise your sites (high keyword density and such), spammy backlinks, duplicate contents, etc. Once your site is penalised, it may be hard to recover, thats why NEVER buy backlinks; spammy backlinks are among the main reason for google to penalise a site.

If your website traffic suddenly drops and you see a corresponding decline in rankings, there is a good possibility that you are on the receiving end of a Google penalty. Google reported in 2014 that over 400,000 manual actions are taken against websites every month by their web spam team (1), and that's really only a fraction of the total number. Many other websites are penalized when Google rolls out new algorithmic updates to Penguin or Panda.

Google penalty is negative impact on website as per google update.

Google penalty denotes the decreasing of your keyword ranking in search engines. It is the negative impact that your website has in search engines.