The Magic Stone (also called the Pendant Stone) is an item created by the ancient Pendant civilization to lead its owner to the soul of the legendary Phoenix. The catch is that only someone with the ancient Tochikan bloodline can operate it.
In the anime series, this person is Holly. She uses the stone to guide the Searchers to where they think the Phoenix's mystery disc is hidden, but what they don't know is that the stone instead leads them to five monsters who possess pieces of Suzaku's soul (Tiger, Mocchi, Suezo, Hare, and Golem).
The stone was originally created to house part of Suzaku's soul, which is why it shows a firebird within it when it is activated. When the user concentrates on what they wish to find, the stone glows yellow and the firebird points the way to the location like a compass. Holly only understands the power of the stone on the surface, and thus has a hard time unlocking its potential as more than just a searching device.
The Magic Stone (like the other Gaea Stones) can also be used as a power source, much like battery or nuclear reactor. The Pendant scientists who helped create the stones also used it to power quite a bit of their weapons technology. The stone projects an energy field which reactivates any of the machinery within a short distance.
Finally, the stone is also important in drawing out the last piece of Suzaku's soul, which was shattered into five Monster Orbs and hidden within The Searchers. The stone fuzes the pieces back together.
Thus it is said: "The stone shall choose its owner, and only the chosen one shall gain its power."
-"Ancient Stone, Part 4" MR4