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The three-way system: 'este', 'esse', 'aquele'

In English, we point things out using a simple two-way system: "this" is near me, and "that" is further away. Portuguese prefers a three-way system. It divides the physical world into three distinct zones: near the speaker, near the listener, and far from both.

This three-part logic applies to pointing words like este, esse, and aquele. It also applies to words for "here" and "there", as well as to abstract words like isto, isso, and aquilo.

Word list
aíA1 there near the listener (there) aliA1 there far from both (over there, visible) aquelafA1 that far from both (feminine) aquelemA1 that far from both (masculine) aquiA1 here near the speaker (here) cáA1 here near the speaker (here, especially in Portugal) essafA1 that near the listener (feminine) essemA1 that near the listener (masculine) estaA1 this near the speaker (feminine) estemA1 this near the speaker (masculine) láA1 there far from both (over there, further away)
Zone 1: Near the speaker

When an object is right next to you or in your hands, you use este for masculine words and esta for feminine words. These pair perfectly with aqui, which means "here" right by the speaker. In Portugal, you will also frequently hear cá to mean "here" in this same zone.

Este livro aqui é meu.
(This book here is mine.)
Esta mala é muito pesada.
(This suitcase is very heavy.)
Zone 2: Near the listener

If something is closer to the person you are talking to, Portuguese has a specific set of words. You use esse or essa to mean "that thing near you". The matching location word is aí, which specifically means "there where you are".

Esse casaco aí é teu?
(Is that coat there by you yours?)
Podes passar essa garrafa?
(Can you pass that bottle near you?)
Zone 3: Far from both

When pointing at something distant from both you and your conversation partner, you use aquele and aquela. The location words for this third distance are ali (over there, usually in sight) and lá (way over there, often further away or out of sight).

Aquela casa ali é muito antiga.
(That house over there is very old.)
O meu carro está lá fora.
(My car is outside over there.)
Quem é aquele homem?
(Who is that man over there?)
The Brazilian exception

While the three-way system is strictly followed in Portugal, everyday spoken Brazilian Portuguese heavily blurs the lines. In informal settings, Brazilians often use esse and essa for things close to themselves, effectively merging the first two zones just like English does with "this". However, the location words aqui, aí, and ali always maintain their strict three-way split in both countries.

Esse livro aqui é meu.
(This book here is mine. - Brazilian Portuguese)
Summary

Remember the three zones: near you (este/aqui), near the listener (esse/aí), and far from both (aquele/ali). If you are in Brazil, you will often hear people simplify things by using esse for objects right next to them.