How does Magic/Armor Penetration exactly work?

I generally tend to run ArPen/MPen runes/builds on burst damage orientated builds for Khazix and Amumu, which generally end up giving me around 65 Flat + 45% Bonus Armor Pen on Khazix and over 80 flat + 35% Magic Pen on Amumu due to runes and itemization. Amumu is ridiculous with this due to his passive reducing 25, Abyssal reducing another 25, Liandries and Boots giving 30 combined + Runes and Masteries for the little extra. Is this efficient, or should I be going for damage oriented items instead after a certain point? I never really understood penetration correctly, as the wording on many of the items doesn't specify whether it reduces their stats below 0 or not. The only reason I do this is because many of the targets I need to shut down (ADC's and Mid Laners) don't build many defensive items against it, and due to the ridiculous amount of penetration I have, even if they do, it generally doesn't affect the damage output I do.