All Cameras start with raw data and convert this data to JPG images with firware in the camera, after the conversion raw data is thrown away as it is no longer needed.
Modern day cameras (high end point and shoot and all DSLRs) have an option to save this raw data, or JPG data or both. You can think about this RAW data as digital negative (you can fix lot of mistakes using this raw data without losing much in terms of quality).
Which one should you shoot?
If you have to ask then shoot JPG.
A RAW file…
• not an image file per se (it will require special software to view, though this software is easy to get).
• typically a proprietary format (with the exception of Adobe’s DNG format that isn’t widely used yet).
• at least 8 bits per color – red, green, and blue (12-bits per X,Y location), though most DSLRs record 12-bit color (36-bits per location).
• uncompressed (an 8 megapixel camera will produce a 8 MB Raw file).
• the complete (lossless) data from the camera’s sensor.
• higher in dynamic range (ability to display highlights and shadows).
• lower in contrast (flatter, washed out looking).
• not as sharp.
• not suitable for printing directly from the camera or without post processing.
• read only (all changes are saved in an XMP “sidecar” file or to a JPEG or other image format).
• sometimes admissable in a court as evidence (as opposed to a changeable image format).
• waiting to be processed by your computer.
In comparison a JPEG is…
• a standard format readable by any image program on the market or available open source.
• exactly 8-bits per color (12-bits per location).
• compressed (by looking for redundancy in the data like a ZIP file or stripping out what human can’t perceive like a MP3).
• fairly small in file size (an 8 megapixel camera will produce JPEG between 1 and 3 MB’s in size).
• lower in dynamic range.
• higher in contrast.
• immediately suitable for printing, sharing, or posting on the Web.
• not in need of correction most of the time (75% in my experience).
• able to be manipulated, though not without losing data each time an edit is made – even if it’s just to rotate the image (the opposite of lossless).
• processed by your camera.