You wrote:....It's an AVI file ......
Sorry but that doesn't help much.
There are a small handful of file extensions that describe that a computer file is a video. These include
avi, mpeg, mov, rm, wmv, qt, swf
Plus a few others.
Think of these as groups of a certain form of video, within those groups are lots of individuals. Liken this to animals, there are dogs, cats, snakes, birds, rodents and so on.
Within these groups are several types. For instance a dog can be a Poodle, Jack Russell, Alsatian, King Charles, Greyhound etc.
The term avi can mean any one of perhaps a hundred different types such as DV, MPEG4, uncompressed, MJPEG, DivX, Xvid, RLE, YUV, Cinepak and lots more.
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The general term for avi infers a lossless format - sort of like the still image formats BMP and TIFF.
The general term for MPEG2 infers a lossy format - sort of like the still image format JPG. With this format every time you save an MPEG2 or JPG item it loses a bit of quality. At first this is imperceptible but after each successive "Save" it gets a bit worse.
Going to extremes sort of like comparing these images:
Regarding "Preferred format" - well this again has no easy answer.
A few years ago the choice was basically a war between DV (Digital Video) and MPEG2 - the format you have to eventually convert to to create a DVD Video Disc. Now we have "High Definition" and so the battleground has changed. A number of formats have emerged which are battling against each other - notably MPEG2 (With higher bit rates than previously used for standard definition) / MPEG4 - highly compressed but high quality - unfortunately very difficult to edit / DivX / Xvid and a few more formats.
The best advice I can give is to try and stick to the original recording format native to the device (camcorder) and only convert it to the output format AFTER marking your video with your intended cuts, transitions, titles and so on. If you are using one of the highly compressed formats MPEG4, DivX or Xvid then it is probably easier to convert that to MPEG2 BEFORE editing. When dealing with standard definition then DV is the preferred editing format.
For more hints and information please view:
Suggested work flow by SJJ1805 for Video Creation
and
From Camcorder to DVD with Video Studio