Its

Contractions:

When the two words crash into each other, there is a plume of smoke (the apostrophe), and a letter (or sometimes more) gets dropped.

Example 1:
It is

It ----><-----is

it-->'<--s

it's

Example 2:

They are

they -----><----are

they --->'<---re

they're


Contractions are not to be mistaken for the possessive form of the homophones that, as the term suggests, sound identical, but are spelled differently.

Its = possessive. Example: My dog wags its tail.
It's = the contraction "it is," or "it has." Example: It's unclear what will happen next. Example: It's been a slow month.

Their = possessive plural. Example: Their house is very warm and inviting.
They're = the contraction "they are." Example: They're going to be late.
There = a noun describing a location. Period. Example: The bag is right there on the table.