The following is a simple primer of 4 major classifications of how loot works. Please feel free to suggests edits/changes to improve clarity and accuracy.
1. Loot system
A. Free for all
This system is also often referred to as global or shared loot. In this system, all drops are visible to all players and first one who clicks the item (assuming they have inventory space) gets it.
B. Personal loot/Instanced loot
In this loot system, drops are only visible to one player in a multiplayer game and only that character can pick the item up.
C. Timed loot
This system also goes by other names. In this system typically, when an item drops it is only visible to one player that will be able to pick it up. After a brief period of time, all uncollected items become visible to the group and these leftover drops are now free for all.
2. Loot drop rates
This is frequency of loot drops.
3. Smart loot and non-smart loot
A. Smart loot means that drops are enriched for the class currently being playing. For example, if playing a barbarian, it is less likely to see class-specific items for an intelligence class dropping or gear drops with intelligence versus strength.
B. Non-smart loop is random in this regard.
4. Item trading
A. Free trade – An item can be freely traded.
B. Restricted trading – This can mean a combination of things. Typically, low tier items are often tradeable but not high tier items. Alternatively, trading can be restricted to party members when an item drops. You can also have a combination of these (e.g. D3:RoS).
C. Bind on Equip - These items are not tradeable once a player equips them.
D. Bind to Account – These items are not tradeable once they are picked up.
Using these four terms:
D2 has Free for all loot, Free Trade, Non-Smart Loot, and Low Drop Rate for legendary items.
D3 at launch had Personal/Instanced loot, Free Trade, Non-Smart Loot, and Low Drop Rate for legendary items.
D3 currently has Personal/Instanced loot, Restricted Trade, Smart Loot, and High Drop Rate for legendary items.