Anchor text has been an SEO buzzword for a while. But what is it?
In short: Anchor text is the text that you click on to activate and follow a hyperlink to another web page or another web site.
An Example: Open Source Web Design
Search engines use anchor text in the link to assign relevance. As search engine algorithms have gotten more advanced, they can also tell if the text surrounding the anchor text is relevant to A. the link itself and B. the destination page that the text links to. In other words: A search engine can detect if a link is so far off topic that there is no relevance and assign it a lower value than a link that is surrounded by related text and linking to. This practice came about recently as blogs became more popular and link spammers used blog comment boxes to spam useless comments laden with anchored links.
Why should you care about anchor text?
If you are targeting certain key phrases, like all websites should be, you want to build links using your prime keywords as your anchor text. Anchor text can vary (and should), but the most impact is derived from getting links that contain keywords that are highly relevant to the page the link is pointing to.
Not all links need to be from external sources. You can build links from one page of content within your website that point to another as well. So, for example, if I want to highlight the fact that we offer internet marketing services such as SEO and inbound marketing, I can do so by making the keywords I want to target into a link that points to my service page for that offering.