A soft reset (howver it's done on the Touch!) is like rebooting a PC- you'll lose all unsaved material, but anything saved is safe. This is a good proceedure for freeing up RAM, or getting out of a badly behaved program or lockup
A Hard Reset is acheived by either a Key/Reset combination (for if the device is not responding at all) or by Settings/Clear Storage. This is the saem as reformatting a PC, putting it back to the 'Factory State' so you will lose all your user data and any programs not part of the ROM.
There is an additional 'Soft Reset' available by pressing and holding the power button for 5 seconds. This forces any pending writes to the system before resetting. The devcie is then left powered down until you press & hold the power button again. This is a true 'Off' state, and in this state no phone or alarm functions will operate until the device is activated again.
There is also another post Hard Reset proceedure- by pressing the reset button when you see the message 'Customisation will start after 3 seconds' you will stop any Extended ROM installations from occurring. This is not necessarily a good thing, as a lot of the Phone Connection customisations are set by this process, but if you want to get rid of some of the extra, un-needed stuff some Telco's install, and you are happy with manually configuring things, this can be a good option.