To understand exactly what makes up a raw camera file, you first need to understand how most current digital cameras work. Sensors create an image from millions of light-sensing areas of a chip. Most sensors actually only record in grayscale values and then use filters and color schemes such as the Bayer Pattern (invented by a Kodak scientist Dr. Bayer in the 1980s) to determine the colors. There are usually three different colors: red, green, and blue.
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Raw camera files are usually proprietary to the camera manufacturer and sometimes a specific camera model. That means that only the camera that captures the picture can understand the information collected on the sensors. The settings associated with them, such as the aperture, shutter speed, white balance, contrast, sharpening, and saturation values are not applied; they are stored for later use. Raw images are primarily used by professional photographers who require complete control over developing their image. However, more and more amateur and hobbyist photographers are realizing the benefits of working with raw camera files.
When your camera processes a JPEG file, it does so using settings which the camera manufacturer has determined to be optimal, but which you have no control over. In addition, the JPEG format employs lossy compression, which means you lose some image quality each time the file is edited and saved.
Most cameras today do a fine job of processing JPEG files, but working with raw camera files puts the power in your hands to determine how the final image should look. Because you are working with the raw camera data, you can fine-tune the final appearance non-destructively, even creating multiple variations of a photo based on the same image data, and opening a world of creative possibilities. The down-side, of course, is that raw images must always go through a post-processing step using the raw conversion software that comes with your camera, or with digital darkroom software. You also won't be able to display the raw files outside of the camera until they are processed and converted to a standard format like JPEG or TIFF.
Because most camera manufacturers use a proprietary format for raw files, third-party raw converters and digital darkroom software must be programmed to understand the raw formats of each individual camera, and must be updated frequently as new cameras come to market. In an effort to standardize raw camera files, Adobe developed the DNG format, which stands for Digital Negative. The DNG format is openly documented, making it easier for third-party software developers to support the format, instead of having to reverse-engineer the proprietary camera raw files from each camera maker. So far, many camera makers have not adopted the DNG format, but converting your proprietary camera raw files to the DNG format can help to ensure long-term future compatibility of your files.