Water-soluble graphite is exactly what it sounds like. It's simply graphite that is soluble in water. Sure, regular graphite can be spread with water a small bit, but this medium is different. When water-soluble graphite is mixed with water, it becomes almost like ink wash. It can be spread over a surface, much like watercolor paint. It can be thinned with water like watercolor paint and it mixes well with other media, like conte and colored pencils.
Water-soluble graphite is available in grades just like regular graphite. In the video tutorial below, I use 2B, 6B, and 9B grades in a crayon form. Graphite becomes progressively softer and darker as the number in front of the "B" gets higher. In other words, 9B is darker and softer than 6B, and 6B is darker and softer than 2B. It also comes in pencil form for accurate details.
Water-soluble graphite is great for sketching in a sketchbook. It's easy to create a range of value in a drawing created on-site with just a bit of water and a brush. It also gives loose sketches a painterly feel without using actual paint.
When considering a surface, pick drawing papers that can absorb the water. Watercolor paper is an obvious choice, however cold press illustration board or heavy drawing paper will produce nice results as well.
Erasing with water-soluble graphite can be difficult. You cannot erase the material after you've added water to it with a traditional eraser. (Like ink wash) Instead, erasing needs to be done in same manner as lifting watercolor. This is accomplished by adding water to a paper towel or a Q-tip and diluting the area that you want thinned. Total removal of the graphite should not be expected.
It's a good idea to approach a drawing loosely when you are making marks with the graphite. You can become tighter with the drawing as you add water to the material.
Here's how to draw an apple with water-soluble graphite...