RAW:
A RAW file will not compress the information, and although it records the details as taken, it saves the information captured without applying any parameters, you then have the option of using Raw conversion software to reset the colour, tonal range and to a degree exposure. Because the file is not compressed all the information captured is saved, nothing is discarded. By allowing you to make decisions about the file parameters after taking you have much greater flexibility. A greater tonal range is possible with a RAW file. There is no single RAW format, rather it is a generic name that describes a a family of file formats. Most camera manufactures have their own formats, some have more than one. This means that there are over 12 commonly used file types - all called 'RAW'. To open these files you need a program that will understand and process them enabling them to be saved as one of the more common file types.
Option 1
The camera manufactures will provide software for their camera, which will usual not open files from other cameras. The quality and usability of this software ranges from reasonable to almost useless. Some manufacturers will charge you for this software.
Option 2:
This involves using 'third party software' written by someone other than the camera manufacturer to open you files. Some are 'stand alone' allowing you to open, adjust and then save the file before re-opening it in a manipulation program (eg. Photoshop). Other provide a plug in to Photoshop or other programs.
Option 3:
Two programs will open most RAW files directly. Both Photoshop and Gimp will open just about all RAW files in an addition interface before loading them into the main program. Although Photoshop offers some extra options, Gimp with Ufraw is an excellent option. Profiles for your camera can be loaded for optimum compatibility. In the raw-converter I adjust the white balance and exposure to ensure that the highlights are not 'clipped' and leave everything else till the next stage.
Photoshop and Gimp open the raw image in an additional 'front end' to the programme, once converted they are transferred into the main program and you can work on them as you would any other image. My method is to first carry out any resizing, cropping and transforming. Next I make colour and contrast adjustments (usually in levels or curves) and finally sharpen the image if required. Individually adjusted images should then be saved into the appropriate folder. Saving files as .tif will maintain the quality, but for photographic lab printing you will need to save as .jpg.