How do you make caramel?

Usually by dissolving sugar in butter, and bringing to the correct temperature. There toughness of the final product will increase the hotter the mixture is allowed to get, and will also be affected by how long it is kept at that temperature. A sugar-craft website will give the proportions of butter to sugar and the correct temperatures for the different levels of caramel/toffee/dentist's nightmare! If you're going to do it regularly, it might be an idea to invest in a sugar thermometer.
To make homemade caramel, I usually put a can of condensed milk in a pot (covered), of boiling water on low heat to simmer for approximately an hour. Careful not to overcook it though or at too high a temperature... Or you'll land up with a big sticky caramel EXPLOSION all over your kitchen walls, ceiling and floor!!... NOT FUN! :-)