RAW files contain two types of data, the collected gray scale data from the sensors and the meta data (data about data). This meta data, apart from camera information, also contains a decoding table which conveys the arrangement of the color filters on the sensor so the RAW converter knows which pixel is what color. The converter uses this data to interpolate the missing color information for each pixel from the data of neighboring pixels. This process is called demosaicing.
The meta data also contains information about how the camera was originally set up to create the RAW file. Such things as white balance, colorimetric interpretation, gamma correction, noise reduction, anti aliasing, and sharpening are needed by the converter in order to do its job. There is no one "correct" interpretation of a given RAW file. Consequently, the camera vendors make a relatively subjective determination as to what looks best and adjust the camera converter to give that result.
Pro cameras allow you to adjust a number of the settings needed for the built in converter such as color space, white balance, resolution, sharpness, contrast etc. However, from a practical standpoint, most shooting situations do not allow you to change these settings from image to image. Therefore shooting JPEG forces you to accept what the camera's RAW converter interprets as being correct. Once this conversion has taken place, you can't go back. The discarded data is lost forever.
When you save in RAW format you have complete control over the interpretation of the RAW data through all aspects of the conversion process. The only camera settings that affect the RAW data are related to exposure (ISO and aperture settings and shutter speed). You control all other aspects of the conversion process.
Most camera's RAW formats capture at least 12 bits of data for each of the three colors. This calculates out to 4096 tonal values, which equates to greater than 68.7 Billion colors. JPEGS, on the other hand, use only 8 bits per color which equals 256 tonal values. This is equivalent to a little more than 16.7 Million colors. So, when you save a JPEG in your camera, you are leaving it up to your camera's built in RAW converter to throw away a substantial amount of the original data. Theoretically this can be more than 90% of all tonal values. Hopefully what is left is what you saw when you took the picture. Additionally, camera vendors apply a rather steep contrast curve to the data in order to produce a snappier more pleasing image. This eliminates about a stop of available dynamic range. Again, you have given over control of what data is deleted to the camera, not you!
A good analogy can be drawn between a RAW file and a latent image on a piece of film before processing versus a JPEG and a processed transparency. With the JPEG, what you see is what you get. With the RAW file you have the ability to reprocess the RAW file into an entirely different image if you want or need to.
Bottom line? If what you are getting from your camera's JPEG is good enough, continue to save JPEGs in the camera. If, however, you want to guard against the camera RAW converter potentially throwing away the wrong data, or you need more control, RAW capture is a great insurance policy.
North American Photo has a complete line of RAW work flows to choose from. RAW to Print, RAW to thumbnails and RAW to Hi-Res. These work flows save you time while providing you with the best quality conversions and industry leading color corrections taking advantage of our proprietary IIES process. Check out our website for more information.