A text effect is the creation of a "special text" by using a font face as a guide. The result usually looks complex and very different of what a font can be, despite such result, in most cases, keeps that shape information inherited from the guide font.
A graphic text generated through an effect can look like anything and can have any color distribution. In most cases, it doesn't make sense changing that configuration to any arbitrary set of colors. Usually a text effect is a final product and should be used "like is". You can make small adjusts on it like you would make on a photo (modifying contrast for example).
A font effect is the creation of a kind of "new font" based on a existing one. The result of this process is something that could be a font itself and could even be used as input to generate text effects.
A font defines the shape of letters and must be simple enough to be successfully rendered by using one color (in fact, there will be pixels of other colors in edges if anti-aliasing is present, but that colors never will be different from an intermediate color between the rendering color and the background color). When we apply an effect to a font, we are modifying the shape of letters and maybe their spacing.
If what you need is a simple text created by using a regular font with "interesting modifications", in fact you want to use a font effect. If you think "I would like to create a text with this font, but would be nice if it was a little different", so you want a font effect.
Picture to People offers a very nice set of font effects, and you can choose from more that 450 font faces. If you like typography, you could like to use P2P Online Font Effects. Despite they are font effects, many of them go beyond what you can get by using a regular True Type font (ttf), as you can see in the second and third examples below.
These samples were created by starting from the good old Arial font. First you have a "Dashed Outline Arial font", after you have a "Frozen Arial font" and finally it's a "Smoke Arial font".
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