The Hebrew name for the book of "Psalms" in the Bible is "Tehillim," which means praises. The poetic verse of this collection of writings was both a testimony of the history of Israel and a sacred songbook of praise for the people of God. The Old Testament figure King David authored an impressive 73 psalms, and as a skillful lyre player you can deduce that he accompanied these songs with instrumental music when he used them in worship.
Hymns, on the other hand, fall under a broader definition. The literal meaning of a hymn is "a song of praise or thanksgiving to God or a deity." Whereas the psalms are considered by their inclusion into the Bible as the inspired word of God, hymns are songs created by humans for means of worship. Some hymns are based on the psalms found in the Bible, but hymns are not limited to those sacred scriptures as written by such authors as King David, King Solomon and Moses.
Traditional Versus Modern
Modern churches and religious ceremonies allow the congregation to participate in the singing of hymns, but this was not always the case. Before the Reformation, Psalms were sung or chanted primarily by the clergy, and musical instruments were not always used. Some modern reformed or Orthodox churches still do not allow instruments to accompany psalms or hymns in more formal worship. As the congregants were included into worshipful song, instruments were also used to create a "joyful noise unto the Lord" through instrumentals.
As songs of praise and thanksgiving, psalms and hymns serve not just as a form of worship to your God, but a way of shifting your own emotions despite your circumstances. Some of the psalms were written to reaffirm faith. Such is the case of the oft-noted Psalm 23, which claims confidence in the midst of conflict with the line, "Yea, though I walk through the valley of the shadow of death, I will fear no evil: for thou art with me."