Raw is the data from the sensor (more or less) it has a lot more information than the jpeg.
When the camera takes a pic they all start as raw, if you have jpeg selected the camera then dumps the data it doesn't need, the other white balance options the 12 or 14 bit down to 8 bit, it then adds the jpeg style adds some sharpening etc and job done.
If you shoot with the camera set to raw it keeps all the extra information in the raw file, this means when your processing it later in photoshop or whatever you make the choices as to colour balance, bit depth sharpening etc etc.
Generally speaking raw have a little more highlight and shadow detail available to "pull back" if needed and if your doing a lot of editing working with the extra bit depth will help with smoother colours and tranisitions in say the sky.
If your after the absolute best quality raw is the way to go, but it does need editing after taking.