How do I get magic dust?

Rootbeerr

I want to create wands to sell, but I need magic gems which need magic dust/powder. Whenever I break a "magic" mushroom or fern or whatever, only a fairy comes out. So how do I get magic dust?

Zephania

Obtaining Magic Dust is actually fairly easy. As a matter of fact your halfway from obtaining some just by breaking a Magical Mushroom/Fern, when the Fairy comes out you simply have to chase it down and catch it and you have your Magic Dust in your Inventory. Personally, I like this way much better, before the Fairy Update (which was included along with The Dungeon Pack Update) if you had broken a Magical Mushroom/Fern you'd only get about 1-2 Magical Dust, from catching a Fairy you'd get about 3-5 Magical Dust.

BJDware

Zephania explained it quite well.
Just as an added note:

Fairies can be caught and held by keeping a glass bottle in your inventory. Capturing a fairy without a glass bottle in your inventory will yield fairy dust that is needed to craft wands.

Bottled fairies can be harvested at any time for dust. Merely drop 1 bottled fairy upon the ground, then catch it without any bottles in your inventory.

Remember, loose fairies will always run in the opposite direction of a player. If chased beyond the edge of a rooms border, they will escape out of reach. Always herd them away and trap them in corners.