A penalty kick is a direct free kick. It is awarded if an opponent commits one of ten fouls that would normally award a direct free kick, but is committed in a player's own penalty area.
The ball is placed on the penalty spot (12 yards perpendicular from the center of the goal line) and only the kicker and the keeper are allowed in the penalty box till the ball is kicked.
There are a number of other conditions (see FIFA.com), but the only other one to be aware of here is that the opponents must be at least 10 yards (or whatever the center circle radius) from the penalty mark. The arc on top of the penalty box marks that distance.
Although all players must be out of the penalty box (and opponents behind the ball to prevent being offside), the defensive team could be within the arc, but still out of the box. This could give advantage to these plaers if the ball bounces off the goal and back into the penalty area.
Since the kicker can't touch the ball a second time, if the keeper doesn't touch the ball, the defending players would have a couple of steps closer to the ball to recover it.