An instance of an object is like a copy of the original object except that the two objects share input nodes so that component modifications are shared between them.
For example, you could create a polygon cube and then make an instance of it. If you then go into component mode and change the position of one vertex of the cube for one of the objects, it automatically changes the placement of that vertex in the other object as well. This is very useful if you need to make frequent model changes to many identical objects in the scene - you only have to manually edit one object and the others automatically update.
Select the original object and choose the option box for "Edit -> Duplicate Special".
Choose Instance and click "Duplicate Special".