For point and shoot users this question is irrelevant as the RAW option is not available. All you can get is JPEG format results. "Why is this important?" you ask, after all image processing programs allow you to edit JPEGs.
Well, yes they do. But what they do not tell you is that every time you open and edit a JPEG image you loose information and that's because it is a lossy format. It is designed to be a relatively small data file. So, if you must edit a JPEG then do all your edits once and save the finished item. That way you will preserve the greatest quality. And keep your original untouched in case you need to revisit your edits.
JPEG vs RAW
So what's the difference between RAW and JPEG format and why does it matter?
In essence a JPEG format file represents a finished picture and a RAW format file represents the raw data from the camera's sensor.
Let's take an image image from a camera with a nominal 10MPx sensor. The image is specified as having 3,648 x 2,736 elements, that's 9,980,928 cells, call it 10 MPx.
For the JPEG (high quality) image the file size on disk is 5,082,045 Bytes, reported as 4.84MB (in data storage 1kB is actually 1,024 rather than 1,000 exactly, hence the slight difference.
For the RAW file the file size in disk is 12,292,096 Bytes, reported as 11.7 MB. That's nearly 2 1/2 times the data. Or, in another way of looking at it, over half the information in the RAW file has been thrown away before the JPEG leaves the camera.
The essence of RAW format
Here we come to another of the main issues. A JPEG is designed to display an image, a RAW file is the data directly from the sensor in the camera encoded by the camera manufacturer. All RAW formats are not the same, Nikon format is different from Canon and Pentax and Sony. Software that reads these files, such as Photoshop, need inbuilt converters that can read the specifc file and turn it into a picture.
Reading in a RAW file
When you load the file into Photoshop then you can adjust the way the data is transformed into a usable poicture - and you do not loose any of the original data. So you can enhance those areas that look really dark - which is great if you under-exposed by a stop. If you do this in JPEG then the noise becomes much more obvious. This is especially if you shoot in low light, and if you are taking landscape pictures in the 'golden hour' then you will really benefit.
White Balance Adjustment
When loading a RAW file you can apply a white balance adjustment. Your camera does not always get this right. Some are particularly prone to over or under compensate when the photo is taken in Tungsten light, but you can fine tune it now and keep all the image's quality.
Camera and lens corrections
No camera and lens combination is perfect. Some lenses suffer from barrel or pincusion distortion, others from chromatic abberations. Many RAW readers can automatically correct for these if they are told the camera and lens combinations so improving your phots a lot.
Why not shoot in RAW anyway?
With all these advantages you would be nuts not to shoot in RAW unless you absolutely must have rapid fire picture taking. Because of the size of the RAW files they take longer to copy to your memory card and so slow down your maximum firing rate. But this is a pretty rare occurence. So shoot RAW as a matter of course.