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Collect one red balloon to get a missile that you can fire off.
Collect two to get a homing missile. Hold down the firing trigger, and you will see a set of crosshairs centered on the nearest opponent. Release the trigger and the missile will seek them out. They're not infinitely maneuverable though, so make sure you don't hit a wall with them.
Collect three red balloons to get a set of ten single missiles. This can be frustrating if you were after a homing missile, as you now have to fire off ten non-homing missiles. But if used properly, you might find it a lot of fun. The only place you can't use a pack of ten missiles is Darkwater Beach.
Collect one blue balloon to get the modest orange boost, roughly equivalent to going over a zipper.
Two balloons give you a stronger blue boost.
Three balloons give you a very strong purple boost.
Collect one balloon and you can deposit an oil spill to trip up opponents.
Collect two green balloons, and the oil spill becomes an explosive mine.
Collect three, and you will be able to leave behind bubbles, like the octopus boss. These trap opponents for a period of time and delay them.
Collect one balloon to use this. It pulls you closer to the player in front of you. It has a limited range, and if you use it while the other player is two far ahead, you will lose it. A good rule of thumb is to hold the trigger down and wait until the crosshairs appear.
Two balloons.
Collect three rainbow balloons to use it. This pulls another player back to you, and it seems to have an unlimited range.
One balloon. Shields all do the same thing; they protect you from weapons and hazards, and they cause players who hit you to lose control. The difference between the three shield levels is that each one lasts slightly longer.
Two balloons.
Three balloons.
Collect bananas during the race to increase your top speed. You lose them if you hit a hazard (or are hit by a missile). You can't get more than ten of them at a time.
Bananas aren't really essential to winning any races, but they give you a slight edge.
There is one key hidden in each world that will enable you to unlock the tournament-style level for that world. If you collect it during a race, it doesn't matter if you win that race or not, you will find that world's tournament level becomes unlocked once you leave the race.