You do not have the same control over your site as if it were hosted with an actual provider. Wordpress.com controls what you can/can't do.

The distinctions between WordPress.com, WordPress, and WordPress.org can cause some confusion. Let’s clear them up.
WordPress.com is brought to you by some of the same folks who work on WordPress, the open source blogging software. WordPress.com is a hosting platform that utilizes the same WordPress software that anyone can download from WordPress.org. With WordPress.com, the hosting and managing of the software is taken care of by the team here at Automattic. With the freestanding WordPress software, you need to install it on your own server or a 3rd party hosting provider.
WordPress.com Benefits

• It’s free and much easier to set up
• Everything is taken care of: setup, upgrades, spam, backups, security, etc.
• Your blog is on hundreds of servers, so it’s highly unlikely it will go down due to traffic
• Your content is backed up automatically
• You get extra traffic from the WordPress.com community — including blogs of the day and tags
• You can find like-minded bloggers using search and the reader
• Your dashboard is secure (SSL) making it even safer to log in on shared networks

WordPress.com Cons

• We provide 160+ themes (and adding more every day) which you can modify and edit the CSS, but you cannot upload a custom theme*
• You can’t modify the PHP code behind your blog*
• You can’t upload plugins

* The VIP program on WordPress.com for high-traffic and high-profile sites allows you to run custom themes, custom PHP code, ad code, and WordPress plugins.
WordPress (self-hosted) Benefits

• Ability to upload themes
• Ability to upload plugins
• Great community
• Complete control to change code if you’re technically minded

WordPress (self-hosted) Cons

• You need a good web host, which generally costs $7-12 a month, or thousands of dollars per month for a high traffic site
• Requires more technical knowledge to set up and run
• You’re responsible for stopping spam
• You have to handle backups
• You must upgrade the software when a new version comes out
• If you get a huge spike in traffic (like Digg or Slashdot) your site will probably go down unless you have a robust hosting setup

Wordpress.com is great if you just want to make a blog about sharing feelings, experiences, etc. However, you can't make money with it. You are not allowed to add AdSense, affiliate ads or anything else.

So, if you want to make money, you have to go for the self-hosted version.

I would recommend against posting on WordPress.org. I think that it is a waste of time for me, personally. That is my opinion and experience.

Excellent information, exactly what I was looking for, thanks

In a marketing (=make money) forum NOBODY should ever advice others to have a blog on wordpress.COM! - unless you want to cover the losses of the person that listened to your very bad advice...

There is no benefits for a marketing blog to be set up on wordpress.com. Period.
Anybody who thinks differently - read their TOS before replying or attempting an argument here!

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If your goal is to generate revenue to your site, then you will need your own domain name based around your keyword(s) and your own hosting. Offering a valuable website and content will bring you the most ROI. If this is your first project take your time and read the forum for a strategy then go to work.

Making money online is no easy task so do it right the first time. If you like the wordpress CMS, set it up on your own domain and server then focus on your on-page and off-page SEO.

Best of luck.

i also wanted to know that.

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I agree. I used to have a blog at wordpress.com but now I have my own domain and hosting
I heard that some IM created a bunch of free blogs on wordpress.com or blogger.com to send backlinks to their main site. Is it ok to do so?

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From my personal experience, its better to design a website through Joomla. There are lots of benefits of using Joomla to create websites such as it helps in developing any kind of website. Not only that you can create simple as well as complex websites through Joomla.

I'd say buy a domain, get a cool hosting with Wordpress easy install feature and you're better than hosting on Wordpress.com . You have much more control over your site.

One more thing, i suggest bluehost for hosting while many mention hostgator. but personally i think bluehost is best!