Inbound Links, also known as back links, refer to links located on external websites that point to your content. They are a core component of a great search engine ranking. It's better to favor fewer, relevant, quality inbound links over spammy inbound links. Search engines will penalize you if you have a large number of "unnatural inbound links".
On Page SEO refers to links and keywords located on your website that link within your site, and sometimes outside of your site. As an example of utilizing an outside link in content, we're linking to moz.com below because the site has a great article addressing On Page SEO:
Links to Your Site and SEO
In addition to the structural opportunities the LVSYS CMS offers, building a body of inbound or backlinks to your website is an important technique for helping search engines differentiate your website based on how often they find it on the internet. The more frequently your website is referenced via backlinks, the faster your ranking will rise. Backlinks from other sites “validate” the value of your web pages.
DO NOT SPAM. Favor quality links over quantity.
Building quality inbound links is time consuming. Read this 10 times over.
It's so easy and tempting to cut and paste generic copy with your own urls on hundreds of sites without paying attention to the relevancy of your content on these external sites. Some companies are expert at this.
Make no mistake, search engine algorithms look for this and call this "spamming". They will penalize your site's ranking and force you to work harder to get these links removed, if possible.
You can build a quality body of backlinks. Post on forums relevant to your industry. Identify the popular blogs for your industry and contribute via comments or guest-blogging. When posting on other sites, vary the URL in your signature according to the forum. Use the URL that best matches your website to the blog or forum. You can also submit your company’s URL to industry directories.
Linking within the pages of your website is important too. In addition to the structured menus LVSYS provides, links from one section of your website to another in the body text are also evaluated by search engines. Pay attention to providing adequate coverage. If all the links in your website are directed to one particular page, search engines will interpret that particular page as very important and the others less so. For example, an important call to action page may warrant the bulk of internal linking. If that’s the desired outcome, continue the practice; if not, look to providing internal links to other pages.
Pay attention to anchor text, which are the clickable words that make up the link. Anchor text is also evaluated by search engines. Use meaningful keywords, relevant to the linked URL, but ensure they sound natural in context. Be careful to not overdo linking. A paragraph or two of text that contains multiple, similar, links to the same page(s) may be interpreted as an attempt to trick search engines and ultimately incur a penalty.
For more information on hyperlinks: Creating and Using Hyperlinks.