It is simple to use, actually. In modern YoWorld, you click to open the chat bar, then click on actions and it will be at the top of the actions menu for you to click on. In old YoWorld, the water balloon had its own special button.
Once a balloon is thrown, you must wait for it to refill. This usually takes a few minutes for this to happen. But if you go into water e.g. the beach, the balloons will refill much quicker and you can throw more.
In Winter 2008, the water balloons were replaced with Snowballs, but returned in Spring 2009.
Hackers can exploit the water balloons feature by editing the game's code to allow them to throw unlimited balloons. This action usually causes anybody inside the same room as them to freeze and have to refresh or closr their browser. Depending on the severity, some people may need to restart their computer to get rid of the lag.