How It Works
Potentiometers, sometimes called pots, are relatively simple devices.  One terminal of the potentiometer is connected to a power source, and  another is hooked up to a ground — a point with no voltage or resistance  and which serves as a neutral reference point. The third terminal  slides across a strip of resistive material. This resistive strip  generally has a low resistance at one end, and  its resistance gradually  increases to a maximum resistance at the other end. The third terminal  serves as the connection between the power source and ground, and it  usually is operated by the user through the use of a knob or lever.
The  user can adjust the position of the third terminal along the resistive  strip to manually increase or decrease resistance. The amount of  resistance determines how much current flows through a circuit. When  used to regulate current, the potentiometer is limited by the maximum  resistivity of the strip.
Controlling Voltage
Potentiometers also can be used to control the potential difference,  or voltage, across circuits. The setup involved in utilizing a  potentiometer for this purpose is a little more complicated. It involves  two circuits, with the first circuit consisting of a cell and a  resistor. At one end, the cell is connected in series to the second  circuit, and at the other end, it is connected to a potentiometer in  parallel with the second circuit.
The potentiometer in this arrangement drops the voltage by an amount  equal to the ratio between the resistance allowed by the position of the  third terminal and the highest possible resistivity of the strip. In  other words, if the knob controlling the resistance is positioned at the  exact halfway point on the resistive strip, then the output voltage  will drop by exactly 50 percent, no matter what the input voltage is.  Unlike with electrical current regulation, voltage regulation is not  limited by the maximum resistivity of the strip.
Rheostats
When only two of the three terminals are used, the potentiometer acts as a type of variable resistor called a rheostat.  One end terminal is used, along with the sliding terminal. Rheostats  typically are used to handle higher levels of current or higher voltage  than potentiometers. For example, rheostats might be used to control  motors in industrial machinery.
 



