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JPG (or JPEG) is one of the most widely used image file formats, favored for its efficient lossy compression algorithm that significantly reduces file size while maintaining a high image quality. It is commonly used for photographs and web graphics; however, the lossy nature of its compression means that some image quality is sacrificed, and this loss can be exacerbated with repeated editing and saving. JPG files support 24-bit color, allowing for a broad spectrum of colors, but they do not support transparent backgrounds.

PSD stands for Photoshop Document, and it is the default file format used by Adobe Photoshop, a popular image editing software. PSD files support multiple layers, allowing for rich image composition and editing. They can store an image's individual layers, text, masks, transparency, clipping paths, and other settings, which are all editable within Photoshop. This format is widely used by graphic designers, photographers, and artists for creating and editing complex images and digital art.