Simply put, a PSD is a Photoshop design file. Technically, it stands for Photoshop Document, which is a proprietary file type from Adobe. Adobe's Photoshop is the software most widely used for web design and works best for the design-to-code process. PSD files are typically opened and edited with Adobe Photoshop, but can be opened with Adobe Photoshop Elements, and even certain non-Adobe products such as Corel’s PaintShop Pro and GIMP. However, programs other than Photoshop will not be able to fully edit or even read the complex layers utilized in many PSD files. Other advanced features within a PSD design may not be properly recognized, either. We highly recommend working with Photoshop from the beginning to ensure it will be universally accessible by designers and developers who may be involved with your project. If you’re interested in a free program to simply view PSD files as flat images (no layers), Apple’s QuickTime, which includes Picture Viewer, will do the trick, but you can’t use the program to edit a PSD file. It is purely for viewing PSD files as images.
The PSD file type supports all image modes (Bitmap, Grayscale, Duotone, Indexed Color, RGB, CMYK, Lab, and Multichannel), which is part of the reason it is so widely used. It also supports clipping paths, channels, transparency information, and multi-level layers while other formats merely present ‘flat’ images. The PSD file type preserves a design as layered images which is extremely useful for future editing (and re-editing) of different parts of a design. Each layer can be worked on individually, without affecting the rest of the elements in a design. You can also use a feature called ‘layer comps‘ to present variations of the same design. Photoshop can convert PSD files to other formats, such as PNG, JPG etc… so you can export a design for a wide variety of uses, like web graphics. It’s also interesting to note that Photoshop files sometimes have the extension .PSB, which stands for “Photoshop Big”. According to Adobe, “The Large Document Format (PSB) supports documents up to 300,000 pixels in any dimension. All Photoshop features, such as layers, effects, and filters, are supported. You can save high dynamic range, 32‑bits-per-channel images as PSB files. Currently, if you save a document in PSB format, it can be opened only in Photoshop CS or later.” You can read tons more about Adobe Photoshop File Formats Specification, if you want to delve further into the technical aspects of the PSD file type.