How to link to a file or folder

Could you clarify this part of your statement regarding linking to local files on disk:
“You can easily link to web sites and files on your disk, but you can also drag files in to attach them.”
How can this accomplished? I know how to insert a link but when clicked it gives “There is no application set to open…” error. I’m not interested in attaching files, I’d like to link them at their current disk location with that link still being live even if the underlying file moves to a different location on disk. (I’m aware that such links would no longer be functional when synced to other devices that don’t have access to the disk in question, that is understandable and fine)

Thanks for the suggestion but unfortunately APFS does not support hard links…

On macOS, you drag the file, and hold down CTRL as you drop. Don’t hold CTRL when you start the drag.