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Digital cameras capture and store photos electronically, instead of using film. Images are captured on a light-sensitive grid, and the information is stored on small memory cards like Compact Flash or SDHC cards instead of film.
Most professional photographers now use digital cameras, and they have a number of advantages over film cameras.
First, digital cameras have LCD screens on back that let you see each picture right after you take it. If Aunt Martha had her eyes closed, you'll know in time to take another shot. And if you're trying to learn the finer points of photography, there's nothing like immediate feedback to tell you whether you've got it right.
Second, memory cards are much easier to use than film. They aren't damaged by exposure to light, they don't require developing, and if you forget about the pictures on the card for a couple months, you won't end up with washed-out images.
Third, storing your pictures on your computer means that they take up very little space, and it's easy to flip through them without bending the corners. Just be sure to make a backup!
Fourth, many digital cameras can record movies, some with sound. Whether you're rafting down the Mekong or watching your child's first steps, there are some times when it's great to have video.
Printing pictures from your digital camera is easy — just bring your memory card to any photo lab. If you want to print pictures at home, you can buy a photo printer that will print very nice images. (Many photo printers can read memory cards, so you just plug in the card and hit print.)
If you keep your pictures on your computer, and you want professional-quality prints, you can order prints from online photo labs like Snapfish or Shutterfly. Upload the pictures, tell them what you want, and your prints will magically arrive in the mail.
There are several types of digital cameras. Professionals use single-lens reflex (SLR) cameras with big detachable lenses. Most consumers use simple point and shoot cameras. And for quick snapshots anytime, small cameras like keychain cameras fit the bill.

Point and Shoot cameras are simple to use — just aim the camera and push the button! Focus, exposure and even flash decisions are all made automatically by the camera. Many have choices of settings for various situations: sports events, outdoor photos, bright sunlight, etc. Special features sometimes include optical and/or digital zoom, movie mode with built-in microphone, and image stabilization.
Most models also have a pre-focus feature which is activated by pressing the shutter button halfway. Point and Shoots also usually have an LCD viewfinder (which is a small screen on the back side of the camera that shows the user the scene they are taking the picture of) in addition to the optical viewfinder found on regular film cameras. They are powered by either AA batteries or a rechargeable lithium battery. Most also have built-in timers for taking picures of yourself!

SLR cameras are the cameras with detachable lenses that professional photographers use. What does SLR really mean? Single Lens Reflex means that the same lens is used for viewing and taking pictures. In other words, you view the scene through the same lens that takes the picture. These types of cameras use a mirror positioned behind the camera lens to direct light toward the viewfinder when you're composing a photo. Light entering the lens is reflected by a mirror up into the viewfinder (eye-piece), allowing the photographer to see exactly what the final picture will look like. When you release the shutter, the mirror moves out of the way, letting light from the lens travel straight to the sensor and momentarily blacking out the viewfinder.
SLR's are much larger and heavier than point-and-shoot cameras and have better autofocus systems. Tele-zoom lenses, macro lenses, wide angle and fish eye are some of the lenses that may be added to most SLR cameras. They are faster at starting, focusing, taking pictures, taking multiple pictures; better at taking pictures under low lighting situations by using higher ISO speeds (no graininess); and offer more professional control over light and depth of field.

Ultracompact cameras are a handy way to keep a camera on you at all times — they're designed to fit in your pocket. However, due to the limited space, the optics may not be quite as good as larger cameras. This means that you may not be able to zoom in as far, and special modes like "macro" (used to take pictures of small subjects like wildflowers) may be missing.
Some Ultracompact cameras are small enough to fit in an Altoids tin, while still having very decent picture quality. For many users, Ultracompact cameras strike a nice balance between size and image quality.
If you really want it small, and cell-phone-camera quality is enough for you, check out the really tiny keychain cameras and pen cameras.

There are two ways to have a waterproof camera. Some compact cameras are specially sealed to make them waterproof to 10 or 15 feet. These are also very durable and shockproof! The other way is to buy a waterproof case. They are either pouches or hard clear plastic boxes. The boxes are called housings and are usually compatible with a specific brand of compact camera. The housings greatly increase the depth to which your camera can be taken. They can reach depths of 130 feet and can be used when scuba diving.