Damage is the abuse that has been dealt to a particular target. HP or Hit Points represent how much damage a player, monster, or non-player character, can take before falling unconscious or dying (see K.O.)
There are two types of damage: Physical and Magical.
The percentage values listed on these items are only partially correct. The formula to determine the exact damage reduction is:
[(Percentage listed on item * 256) Rounded down] / 256
Example: Earth/Terra's Staff is listed as -20% physical damage taken.
20% * 256 = 51.2
51.2 rounded down is 51
51/256 = 0.19921875
Actual reduction = 19.921875%
Damage reduction caps out at 128/256 (50%).
Physical Damage is defined as damage dealt to you from a physical source, such as a monster stabbing you with a knife. Other sources could include damage from area attacks, usually Jumping attacks, or attacks which involve monsters smashing their bodies into you. Overall physical damage is resisted/reduced by one's Defense and Vitality.
Magical damage is defined as damage dealt to you from a magical source, such as a monster casting Stonega IV on you. Other sources could include damage from area attacks, usually grenade blasts or other explosive abilities, or attacks which deal Damage Over Time. Overall magic damage is resisted/reduced by one's Magic Defense, Intelligence, and Mind.
Equipment that affects physical damage taken
Equipment that affects magic damage taken