When search engines give a website a rank they also factor in how popular that website is on the basis of how many other websites like to it. Link popularity is basically how many websites link to your website or a page in your website. This is a very important factor in search engine ranking. Search engines routinely send out their spiders, which are actually small programs, to crawl through the links in indexed websites. These spiders follow all the links they see, even the ones going out of an indexed website. This has created the concept of reciprocal linking. Websites will often have reciprocal links pointing to each other. Such an arrangement is reached through mutual consent and through link exchange services. Over the years search engines have become smart and can now figure out if such linking is being carried out for sheer page rank achievement rather than any real relevance.
Today, most link building exercises begin with Yahoo and other web directories such as Joe Ant and Dmoz. There is no clear criteria that helps determine which directory is better than another and most of the time it is just personal preference. One thing to keep in mind is that you should always establish reciprocal links with a website that enjoys better search engine ranking than your own, otherwise it just does not make any sense. Toolbars like Google Toolbar and Alexa can instantly give you the page rank of any website you visit. Note that reciprocal link means that your website will have to feature the link of all websites with whom you decide to exchange links.