There are two primary compression schemes for image files used on the Web today: GIF and JPEG. Both file types are universally understood by all web browsers. Although often used interchangeably for images, GIF compression and JPEG compression are each suitable for very different types of pictures.
GIF compression works best with images that have lots of flat color space (no gradations or continuous tones), such as drawings and flat-color graphics.
JPEG compression works best with pictures that are photographic in nature, without sharp edges, and containing lots of graduated, continuous tone color.
Here's a page that graphically demonstrates the differences between GIF and JPEG compression, in brief.
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