Working Spaces
A working space defines the range of colours available to you as you edit your images. You can think of this as being similar to a painter's palette. If a colour isn't on the palette, you can't include it in the painting. With digital images the same situation applies, although there are a very large number of colours available. At first glance you may think that you want to have as large a working space as possible, so that a huge range of colours is available. However, bigger isn't always better. In the case of a working space, bigger means covering a broader range of colours, but it doesn't mean you actually have more colours available.
A digital image can store a finite number of possible colours. With 8-bit-per-channel (24-bit) images, that number is over 16.7 million colours (16,777,216 to be exact). That's a pretty big number, but it is a limitation. In reality, you aren't going to be able to reproduce all of those colours because a printer can only produce a certain range. Also, as you edit the image, you're going to lose even more colour possibilities. Even though a large number of colours still comprise your image, the bottom line is that the number of colours available is finite.
A working space effectively defines the outer limits of colours available from the visible spectrum. This range of colours is the effective colour gamut of the working space. Keep in mind that the colour gamut of the monitor or printer used to reproduce the image may not be as wide as the working space. That means you can have colours in your image that can't be reproduced on certain (or any) devices.
A very wide-gamut colour space extends to highly saturated colours that may not be reproducible, depending on the output method. In other words, it has a wider range of possible colours, but those colours might not do you any good.
Bigger is not necessarily better when it comes to working spaces. While a wide-gamut colour space extends to a broader range of possible colours, the total number of colours available for a given image does not change. If the same number of possible colours is spread across a broader range of the colour spectrum, the space between each colour is much larger. The result is a greater risk of losing smooth gradations of colour in your image. The best solution is a working space that most accurately represents the colour range you are likely to actually use in your images for the various output methods you will utilize. There are situations where a wide-gamut colour space may be desirable. For example, when working with images from Ektachrome films that you intend to optimize and put back onto film with a film recorder, the Ektaspace colour space would be a good choice (though it isn't provided with Photoshop, so you'll need to obtain it elsewhere). For most photographers, there are few - if any - situations where a wide-gamut colour space would be necessary.
Setting a working space does not mean that every image will be limited to the range of colours for that working space. The working space settings simply provide default colour spaces for each of the colour modes. You still have the option to leave an image in the colour space it has been saved with, or convert it to a completely, different working space. The space you set as the working space will also be used as the default colour space for any new documents you create.
RGB Working Space
For most photographers working in the digital darkroom, the only colour space that is important is RGB. Even though photo inkjet printers use CMYK inks, they should be considered RGB devices and the images should be kept in the RGB colour space during editing and printing. Because most photographers intend to print their images, I recommend using the Adobe RGB (1998) working space rather than the default of sRGB.
sRGB Working Space
For images destined for display on a monitor, such as for e-mail, web, or digital projection, the sRGB colour space is an excellent choice. This colour space is designed to match the typical monitor display. Although every monitor is indeed different, this space does a good job of including the colours that will be available with most monitors, even if they aren't calibrated. If you are working with images primarily for this type of image, then the sRGB colour space is probably your best option.
The sRGB colour space has a reputation as being "useless" for images that will be printed. This is an undeserved reputation, and excellent prints can be produced with images in this space. However, sRGB is not the best option for images that will be printed, because is doesn't include as many printable colours as the Adobe RGB (1998) colour space. If you will use your images for more than one purpose, you should probably consider Adobe RGB (1998), converting images destined for display on a monitor to sRGB during final preparation.
Adobe RGB (1998)
The Adobe RGB (1998) colour space is widely regarded as the best choice for images that will be printed on photo inkjet printers. It very closely matches the available colour gamut of photo inkjet printers, so that very few colours are clipped. At the same time, the colour space is not significantly larger than the colour gamut of most photo inkjet printers, so that smooth gradations aren't lost due to a colour space that is larger than necessary. For images that will be repurposed to a variety of output methods, and in particular for images that will be printed using photo inkjet printers, I consider this the best choice and, therefore, recommend setting it as the default RGB working space in the Colour Settings dialog.
ColorMatch RGB
The ColorMatch RGB colour space fits somewhere between sRGB and Adobe RGB (1998) in terms of colour gamut. It offers a wider gamut than sRGB, but not as wide as Adobe RGB (1998). It is a very good choice for images that will be repurposed for a variety of output methods, but not as good a choice as Adobe RGB (1998).
CMYK Working Space
For most photographers, working with CMYK images isn't an issue. Even when it is, it generally won't be frequent enough and for the same output device that a common CMYK working space can be established. In general, keeping your images in RGB mode for as long as possible is preferred, because a conversion to CMYK involves a conversion to a colour space specific to particular output conditions. Once you have converted an image to CMYK, you will have sacrificed some degree of colour and tonal range in the image, in most situations. This is part of the reason that I recommend that you keep your archival master image files in the RGB colour mode and only convert a copy of the master image to CMYK for specific output needs.
If you are required to convert to CMYK for a particular output process, that conversion should be one of your last steps in preparing the file. In those situations, you should use a custom CMYK profile for the specific output device to be used. Otherwise, I would leave the CMYK conversion to the printing lab.
If you work with a large number of RGB images that you must convert to CMYK, or you actually have to process CMYK images, all for the same output conditions, then it is a good idea to set the profile for the specific output conditions as your working space, so that when you open CMYK images or change images from RGB mode to CMYK, the appropriate profile will be applied.
Because the CMYK profile used for images that must be converted to or edited in CMYK mode is device specific, you probably can't really settle on a standard CMYK working space, but instead will need to adjust the CMYK working space on a per-job basis when you have the need to produce CMYK files. If you have no idea what sort of CMYK profile or output process might be used in the future, I recommend setting the CMYK working space to Euroscale Coated v2. Just remember that this is a generic working space that won't necessarily provide you with an accurate picture of what your images will look like in print. It is a reasonably good generic working space, in that most output in the U.S. is conducted on web offset presses. However, to get the most accurate results, you'll need a custom CMYK profile from your printer.
Gray Working Space
The Gray Working Space sets the default colour space for grayscale (black and white) images. Because grayscale images by definition don't have any colour information, this isn't a matter of matching colour so much as it is a matter of matching tonal values. For grayscale images that will be used primarily on a monitor or digital projector, I recommend using the Gray Gamma working space that coincides with the gamma you have targeted your monitor to during calibration. In general, that means Gray Gamma 2.2 (or Gray Gamma 1.8 if you calibrate to that target gamma.
For grayscale images destined for print, the primary issue that will affect the appearance of tonal values in the final display will be dot gain. This is the spreading of ink on paper, which causes tones to look darker because there is more blending of the individual dots used to produce the various tonal values. For images destined for print, I would use a Dot Gain setting that matches the approximate dot gain of the output method you will be using - most often Dot Gain 20%.
Keep in mind that in most situations it is better to keep your grayscale images in the RGB colour mode, making the Gray Working Space setting relatively unused.
Spot Working Space
If photographers are unlikely to work with CMYK images for editing, they are highly unlikely to use spot colour, which produces images with a single ink colour. This obviously doesn't result in good tonal range in the final result, although spot colour can be added to CMYK images to extend tonal range. Spot colour would be more of an issue for a graphic design firm, or other companies producing printed pieces that include images, rather than photographers producing prints of their own images. In the rare situation where you do need to use spot colour for an image (such as a low-budget newsletter), the important factor is dot gain. If you need to use spot colour, get the specific dot gain specifications for the particular printer. As a general starting point, I recommend setting the Working Space for spot colour to Dot Gain 20%.