There are two basic types of colored pencil - wax-based and oil-based. Wax pencils are cheaper and more common but less solid (more likely to crumble and produce tiny broken fragments) and oil-based pencils produce cleaner, sharper lines and are more solid. There are also a few brands of 'watercolor pencils' made with either wax or oil, that can dissolve in water and thus can be used much like a sort of watercolor paint. 
That said, ordinary colored pencils can also be used to create 'soft' blended images. Blender pencils are colored pencils without the color. Like the acrylic painter's 'matte gel' they can be rubbed over the surface of a drawing to smooth it out and blur it, offering a softer and more painterly effect. And like the 'gloss gel' used in painting, there are also burnisher pencils - which are essentially blender pencils with a bit of shininess or glossy reflectivity. These blender and burnisher pencils allow for more effects than would be possible with the colored pencil set alone. 
With colored pencil, as with regular pencil, I'll recommend the artists' vinyl erasers - the white ones - as a pretty good way to minimize damage to the paper. These artificial erasers are good at removing pencil marks without wearing down the paper. The cheap pink erasers you remember from school, the ones on the end of your #2 pencils? They're not as good. 
Often colored pencil will be applied in layers. Forget your childhood coloring books, which used one color per area. That won't be as interesting for a realistic colored pencil artwork. Try thinking about the tones of color on an object, and layer them. Starting with the darker colors is best - they're very opaque against the paper and it's clear to me that dark colors placed over light colors, will overwhelm the light colors. The reverse isn't true - if the dark colors are applied first, the brighter colors can be layered on top and both the light and dark colors will be visible. 
With pencil art, as with canvas, surfaces do matter. Consider the roughness or smoothness of the paper you draw on - the smoother papers are easier to fully cover without those obnoxious little dots of white which make your pencil art *look* like rough pencil art. I've had this problem persistently with painting as well and am just now beginning to go over my canvases with a square of sandpaper, simply to smooth it out a little. This said, sometimes rough surfaces are what you want! It all depends on the effect you're going for and the subject you're drawing. Is it smooth or rough? Maybe your subject is a scene with multiple objects, some of them smooth and some rough, in which case you may want both! 
Absolutely, because the skill of the artist matters far more than what they work with. Just because the pencils aren't pricey like oil paints, doesn't mean you can't create beautifully rich and detailed artworks with them. Take a look at the still art section of this website - particularly the colored pencil art page and the 2015 pages, which also contain some colored pencil art. A little secret for those of you commissioning art from me on eBay: My paintings are selling for increasing prices lately, and so are my oil pastel works - but the pastel pencil and colored pencil works I sell often go for about 20 or 30% less in final auction value, despite the fact that they're generally more detailed per square inch, than the other art types.

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