Object Linking and Embedding
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Office provides two ways of sharing data between different applications.  You can ‘LINK' two applications, or you can ‘EMBED' one application in another.  Both methods have advantages and disadvantages.

Both methods insert a copy of the object in the target document.  However, what distinguishes these methods from each other, is how the inserted object behaves after it has been inserted into the target document.

A LINKED object retains its connection with its original file, and reflects all changes made to that original file.  An EMBEDDED object becomes an integral part of the new document, and becomes isolated from the original file.

You would use LINKING if your target document needed to accurately reflect the latest changes made to the original file (eg: You might link an Excel table of currency exchange rates in a Word document which reports on the current exchange rate).

Drawbacks?  Linking is extremely hungry for computer resources, and unless your computer is fairly powerful, linking might take a long time to establish - or your computer might simply refuse to do it.

Step by step:

Select the Insert/Object... menu option.  You will see the following dialog box.

insert1 

From the Object types listed (scroll down to see the rest), select the object you wish to insert into your document.  You can either insert an existing object, or create a new one. Notice one important distinction here, though.

You can only LINK an existing document, so if you choose to create a new object, it will be EMBEDDED.  Let's create a new Excel Worksheet... (it will be embedded, of course).  Word will create the object, and place it within the current document, like this...

insert2 

You may now edit the cells as required.  Click outside the object, and it becomes deactivated.  You may continue entering the rest of your text as usual.

If, however, you wish to LINK an object, you will need to insert an already existing document.  Click the Browse... button, navigate to the spreadsheet file you wish to link, and click OK.  The complete spreadsheet now appears in your Word document like this (and cannot be edited - except by the originating application - since its appearance here in your Word document is ‘read-only').

insert3 

Of course, (as usual) the most common editing features available in Word appear as tools on the toolbars - inserting an Excel spreadsheet is one of the tools available on the main toolbar.