It is mentioned at XDA Developers that one should do Factory reset or hard reset. I'm a bit confused about what is hard reset? Factory reset I suppose is using the option in settings to reset phone to the factory state i.e. when it was unboxed.
A hard reset is traditionally when you kill all power to the phone and then boot it up from that state. Normally you remove the battery, then put it back in and boot up. You're right about factory reset -- it erases all your settings and data, leaving the OS. Unfortunately, some people use "hard reset" when they really mean "factory reset".