Compass

Compasses were added in Seecret Friday Update 9 on September 10, 2010. The compass needle points towards the initial spawn-point at all times, in your inventory screen, chests, lying on the floor or while holding it in your hand. When the compass needle is pointing straight "up" relative to the player, the original spawn point is straight forward. Very specifically, your spawn point is the center of the block you spawn on when starting the game, while the compass points to its north-east corner.

If brought into The Nether the compass will wildly point in random directions, making it entirely useless for navigation.

You do not actually have to build a compass to see which direction your spawn is in. Just place the necessary components into their places on a crafting bench and it will point towards your spawn. This can save you some iron and redstone.

If your home is near your spawn, the compass is very useful to help you find your way back. Using a map editor to change the position of your spawn point to your homestead makes this even easier.

Sleeping in a bed sets your respawn point, but your compass will continue to point to the last point you actually spawned at. The compass will not point to the new spawn location until you have died and respawned there.

Trivia

 * The compass, along with the Clock and the Fishing Rod, is one of the few tools you can stack.