Image by turr1.
Using smart objects is convenient if you need to open a vector file in a raster editor, in particular, to open a *.eps file format in Photoshop.
Smart Objects appeared in Photoshop starting with CS2. A Smart Object is a container, which may have various types of content, including vector objects that are imported from vector file types; however, Smart Object can contain raster files too. Visually, the Smart Object is displayed in Photoshop as a layer with which you can perform any operations without losing quality; at the same time, vector objects may be edited without rasterization, which means no loss of quality too.
There are several ways to create smart objects.
Through the File menu:
- Open As Smart Object
- Place Embedded
You can also open an object by simply using "drag-and-drop", via clipboard from Illustrator, or by creating a Smart Object from the menu of the Layers panel.
A smart object can be rasterized from the context menu of a layer or by merging two or more layers.
Smart objects can be linked with external files. This reduces the size of the PSD file and makes it easier to work with multiple elements. The option is available in the File menu; linked objects can be edited in other programs and are automatically updated in your working file, to which they are attached. Not only partial editing is possible, but a complete replacement of the contents of the associated file as well.
To create a copy of the associated object, you can use the context menu (New Smart Object via Copy). The copy will not be associated with the original linked file and will not inherit any changes made to it afterwards.
Credit: Explained at VectorGuru