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The tutorial explains paragraph rules and shading, highlighting that these features are applicable only at the paragraph level and cannot be used on selected text within a paragraph. To create a highlight effect, one can manipulate character-level settings instead. For example, to highlight specific words (like "ham," "turkey," and "pastrami"), the text is selected, including spaces on either side. By accessing the character panel, users can select underline options, ensure the preview is enabled, and activate underline. This can be customized by changing the color (like to magenta) and adjusting the weight of the underline, effectively creating a highlight effect beneath the selected text.