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This field property is specifically for the "Reference" field. It allows you to set one or more content types of which the entries can be added as reference.
To set content types as reference, click on the "Referenced Content Type" dropdown field. Then, select the content types you wish to set as reference, and click either on Save or Save and Close to save the changes.
Once this is done, the content managers, while creating an entry, would be able to see all the entries of the referenced content type(s) under the reference field dropdown. They can then add any entry as reference within the given entry.
