How an external link works
An external link points from your page to an address on a different domain. Technically it is the same tag as any other link; the difference is where it lands and what it says about the page it sits on. A crawler follows it, records that your page referenced that source, and may pass a share of ranking value to the destination.
The rel attribute changes what the link declares. A link marked nofollow tells search engines you do not vouch for it. Sponsored marks a link that was paid for in money, goods or services. The ugc value marks links inside content other people wrote, such as comments or forum posts. Google now describes the plain nofollow value as a hint it may or may not act on, but the honest labelling still matters, because paid links without a sponsored or nofollow marker are exactly what its guidelines forbid.
Why external links matter
Citing your sources is how a page proves it did not make things up. If you quote a figure, name a rule or describe a product’s behaviour, linking to the place that states it lets a reader check you, and that is the same behaviour a careful analyst or a fact-checking system looks for. Pages that assert everything and cite nothing read as thinner even when the writing is good.
The usual worry — that linking out drains value away from your own site — is not supported by how ranking actually works. A page that helpfully points somewhere better is not punished for it. Losing readers is a design question about where and how you link, not a ranking penalty, and links to references are usually best placed after your own answer rather than before it.
Where external links go wrong
The commercial failure is linking without labelling. Affiliate links, exchanged links and links included as part of a sponsorship all need the appropriate rel value, and stripping it to make the link count is a link scheme, whichever side of it you are on.
The quiet failure is decay. Links you added in good faith go dead, get sold, or start redirecting somewhere unrelated, and nobody notices for a long time. A site that repeatedly sends readers to expired domains and error pages looks unmaintained. Linking to a source you have not read past the headline is the third failure, and the one that damages trust fastest when a reader checks.
How to act on it
Link out when the source genuinely supports what you have written, and name the source in the anchor so the reader knows where they are going before they click. Prefer primary sources — the official documentation, the regulator, the original research — over an article summarising them.
Review outbound links periodically, at whatever interval matches how much you publish, and either repoint or remove the dead ones. Label anything commercial. Treat this as part of the same editorial standard as your internal links and your wider content SEO work, rather than a separate compliance chore.