How Many Colours Can My Panel Really Show?

Understanding 16.7 and 16.2 million colour specs.
 

Firstly, some widely used terms to describe colour levels:

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24bit = 8 bit = 16.7 million colours
18bit with dithering = 6 bit = 16.2 million colours
true 18bit = 6 bit = 262,144 colours

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On paper, TFT screens are able to display 256 shades of red, 256 shades of blue, and 256 shades of green. The combination of all three provides 16.7 millions of different shade. This is what a VA or IPS screen does and these panel technologies offer true 24bit colour traditionally. Please also see "6-Bit vs 8-Bit, Are Things Changing (TFT Central Article)"

TN screens are more economical. In fact, they only display 64 red, 64 blue and 64 green. The maximum amount of colours is 262 144. In order to reach 16 million colours, the manufacturers use a process called dithering. This process displays two close colours so quickly that only one is seen allowing them to give the impression of much better colour reproduction.

So instead of recognising all 0,1,2,3,4 shades and so on until 255, TN screens only knows the shades 0, 4 ,8 ,12 ,16 ,20 … until 252. This method is very efficient. But it still has two main issues: the screen flickering is perceptible and the shade 253, 254 and 255 cannot be displayed. With the dithering, all colours are displayed from 0 to 252, so the result is 253 red x 253 blue x 253 green = 16.2 millions of colours. There are now a multiplicity of algorithms that make this possible and more or less effective.

Some good resources for more information are:

6-Bit vs 8-Bit, Are Things Changing (TFT Central Article)
BeHardware’s explanation here
Tom’s Hardware explanation here