Anchor text is the words that are used inside of a text link. For example, all the words in blue in search marketing services are anchor text. Anchor text can link specific parts of a web site or link to another site. Simply using click here tells visitors to what to do, but not necessarily what the link is to.
In my site I use anchor text for two purposes. To take visitors to a service or aspect of my site they may find beneficial such as testimonials or keyword research. I also use it for phrases they might not be familiar with, such as black hat SEO, to educate them.
Anchor text can also influence rankings. The most famous example of this is when webmaster began to use the anchor text miserable failure to point to George Bush's official web site. The result was that this page showed up whenever anyone performed a search for miserable failure on Google. Google has since corrected this, but it does show the influence of anchor text. This case study shows the influence of link building.