What They Are
Adobe says: “Smart Objects are layers that contain image data from raster or vector images, such as Photoshop or Illustrator files. Smart Objects preserve an image’s source content with all its original characteristics, enabling you to perform nondestructive editing to the layer.”
[Magic Container ] I say: Smart Objects are magical containers. They can hold an image, a vector graphic, or a complex set of layers. You can duplicate a Smart Object many times within your file and update the Object once to change all instances. You can apply filters to a Smart Object non-destructively, so you can remove them at any time. You can also transform Smart Objects (scale, rotate, skew, distort, etc etc.) without losing the original image data or quality.
How They Work
Like everything else in Photoshop, there are multiple ways to create a Smart Object. You can:
Start With A Vector. You can use File > Place to pull vector graphics (made in Illustrator) into your Photoshop file. Alternately, copy the artwork in Illustrator and paste it into your Photoshop document. A dialog box will come up with options for pasting – select “Smart Object”. Once you’ve placed it, Photoshop maintains a direct link to the original graphic. If you try editing a Smart Object made from a vector it will open up right in Illustrator.
Grab A Layer. Sometimes, a single layer might be a good candidate for Smart-Objectness. Say you have a bitmapped image you want to resize – but you’re not sure what size you want it to be yet. Scaling things more than once (say, down 20% and then back up 20%) can ruin your pixel data fast, but making the image a Smart Object before you transform it will avoid this problem. Making one is easy – just right-click on a layer and select “Convert To Smart Object”.
…Or Multiple Layers. This is my favorite way to use Smart Objects. You can turn a group of layers into a Smart Object, creating reusable components and cleaning up your layer palette. Again, right-click and “Convert to Smart Object” from the Options menu.
Once you’ve created a Smart Object, it’ll look like this in the layer palette:
To edit a Smart Object once you’ve created it, double click on the layer. It will open up in a new window. Make your edits, then be sure to hit Save before closing. Once you save the Smart Object all instances of it will be updated in your main Photoshop document. Don’t forget to save! If you close it without saving you will lose all your changes.