Let’s take a look at the differences between digital image capture using both JPEG and RAW formats. While it is common knowledge that most professionals prefer shooting RAW, most people do not understand why they do, nor what it actually entails.

JPEG
JPEG is essentially an end-user format. Think of a JPEG like a print.
JPEG offers an excellent balance of quality and compression. However, because JPEG is a "lossy" compression scheme, your images can be visibly degraded by the compression process, especially if used over and over. As such, conversion to JPEG is typically a final step. Much like with a photographic print, if you wanted to change something, you wouldn’t scan the print. You’d go back to the original negative. This is where RAW comes in.

In this next example, the RAW file has now been processed with the correct white balance. However, we now have a high degree of color noise. Note the little dots of red, green and blue in the background. This is Photoshop CS’s Adobe Camera RAW plug-in applied with low noise removal. Adobe Camera RAW seems to be particularly vulnerable to color noise in tungsten light. Choosing which RAW processing software to use is a lot like picking a lab. Just as different labs process film differently, so too does RAW software.

Here’s a blowup from a very “difficult” situation: a low light, high ISO capture with a slow shutter speed. 1600 ISO @ f2.0 and 1/30th of a second. Shot as a Nikon RAW .NEF file.
This was a scene lit with tungsten light, but shot with the wrong white balance: daylight at 5500 K. Note the unnatural amber tint as a result.
In this last example using Capture One, much of the color noise has been removed. The grain in the background is no longer nearly as distracting, and the subject’s complexion has improved. Note also how the image is softer, and will therefore need more sharpening. However, this is usually an acceptable trade-off, as color noise is often the single worst offender in terms of image degredation.
This example illustrates just how differently the exact same digital negative can be processed in the digital darkroom. Just as with film, a photographer’s craft and skills in the digital darkroom are just as important after capture as they are during it.
RAW
RAW is essentially the original digital capture. Think of RAW like a digital negative. It needs to be “processed” before it can be used.
RAW files have two advantages over JPEG:
1) RAW offers lossless compression, meaning your images will exhibit no artifacts as a result of being compressed.
2) RAW is the original information as recorded by the camera’s sensor. This means that the files have yet to be processed. White Balance, Exposure Adjustment, Noise Reduction and Sharpening can all be “processed” afterwards, without loss of quality.
Now, in most consumer digital cameras, the original RAW information is actually being processed “in camera” at the time of the exposure. This means that your camera is making a number of very important decisions, on the fly, and automatically converting them to JPEGS. Considering that the new Adobe Photoshop CS Camera RAW Plug-in has over 20 different settings for RAW processing alone, this is a lot of “work” that your camera needs to “get” exactly right for a good image. “Fixing” any number of these settings later will degrade image quality.
Much like Ansel Adams would do in his traditional darkroom, RAW processing in the digital darkroom is very much an art -and not a science. There are a number of different variables that need to be accounted for and balanced against each other. There is no “right way” to process a RAW file. Let’s consider some of these variables now.