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Some cameras offer a choice of image format that includes jpeg, tiff, and raw. The jpeg format utilizes lossy compression and the tiff format is lossless. While we want to retain as much detail as possible, lossless compression comes at a price: a substantial increase in file size. Instead, utilize the highest in-camera jpeg quality setting and results will be indistinguishable from tiff files.
Raw files are also lossless, but another breed entirely. When you shoot in raw mode data from the sensor is directly recorded with no adjustments. Camera settings you made for saturation, contrast, sharpening, and color space are ignored with the expectation that you will specify these parameters later in Photoshop. This means you can take pictures without concern for these factors. Later, in a more relaxed setting, you can make adjustments in Adobe Camera Raw (ACR).
In addition to the above adjustments, you can specify white balance. Although you can correct white balance in Photoshop proper, the Temperature/Tint sliders in ACR are intuitive to use and often do a superior job because they're operating on linear data.
For less noise and improved tonal scale, increase exposure as much as possible without clipping highlights. In other words right-justify the histogram or expose to the right (ETTR). The effect on noise reduction is illustrated below on a 100% crop of an ISO 1600 image taken with a DSLR. Brightness was adjusted within Photoshop to produce similar tonal values in both images.
The histogram displayed in a camera is based on JPEG settings. For example, if you specify a high contrast for JPEG images, then switch to low contrast, the histograms will be different. This is true even if you are shooting raw. For maximum histogram accuracy when shooting raw, set contrast to the lowest possible setting. In this way the histogram will most accurately reflect the amount of highlight headroom available and you can accurately ETTR. If you're camera supports RGB histograms, choose this option to ensure individual color channels are not blown.
If you're shooting JPEG images I suggest you allow a bit of headroom in the histogram. In other words, don't ETTR. Instead, leave about a 1-stop gap for highlight recovery.
JPEG images are, in a nutshell, raw images that have been processed by the camera. This processing includes noise reduction. For black & white images this turns digital noise into mush. Especially at high ISO values. For better results shoot raw and avoid noise reduction. The result will be "digital grain" with improved sharpness that actually enhances the image.
In CS3 ACR do not use conventional Grayscale techniques. Instead choose the HSL/Grayscale dialog, click on the Saturation tab, and set all sliders to -100. The results will be cleaner than other methods. As an experiment try setting Clarity to 50% and boost sharpening Amount until the grain is well defined. Then adjust Exposure, Brightness, Contrast, and Blacks. Especially Blacks.
Deciding which format to use can be problematic. Raw files require additional processing. If you're a sports photographer and shoot hundreds of images a day, extra steps are the last thing you need. If you take ten pictures a week, and strive for perfection, then raw makes sense.
While the raw format offers potential for improvement, gains are often small. For example, you can't look at an image and identify whether or not it was originally shot raw. The illustrations on this page are edge cases. White balance is usually okay. Blown highlights are the exception rather than the rule.
High noise levels are the result of shooting at high ISO settings. At lower ISO settings the change in noise with respect to exposure is far less dramatic. Let's face it. If you're shooting at a high ISO are you in a position to increase exposure to avoid noise? Perhaps JPEG, with lower noise levels due to in-camera processing, might be a better option.
There, I hope you feel okay shooting JPEGs.
So which do I use? Raw or JPEG? For me there's only one good answer: RAW. I shoot raw for several reasons:
When you shoot JPEG images you're letting the camera make all the decisions. With raw you make all the decisions in a relaxed setting in front of your computer. I recommend you give raw a try. For a bit extra work the rewards are significant.