It is a link embedded within the content of an article published on a website. Ideally, there should be words before and after the link, also preferably the link should be located at the beginning of the article, likes within the first paragraph. Remember you put the link at the end of the article, strictly speaking it is not called contextual link.

It usually means links within the article, like the links put this way: "blah...blah....Wal-Mart will host its "Super Saturday" event on Nov. 5 from 11 a.m. until midnight. Deals include: Xbox 360 250GB Console with Kinect, $399 plus a $50 Walmart Gift Card; Nook Color, Rollback $199, originally $249; and LG 47" Class LED TV, $698. blah...blah...."

Blogroll links or links in the menu bars are not usually considered contextual links.

For what it's worth, contextual links are generally more valuable, than a blogroll link. Assuming all else is equal i.e PR of the page/website etc.

ive always been under the impression a contextual link is the type of link you would use for popups/popunders (ppv traffic), is this not correct?

No Mike. Contextual = In-content

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Well contextual links in simple and easy words are the links too you website present in a paragraph of content.

Contextual link is an effective way to improve your targeted keyword phrases to gain high rankings in search engine, and it is also considered a quality way of building links.

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it's an effective way to improve your targeted keyword phrases to gain high rankings in search engine

it means when you have a hyperlink to your website with the right anchor text to your website in a text that is relevant to the keyword. For example:

In this article we will talk about different aspects of marketing for dentists called dental marketing. Dental Marketing can be conducted online or off-line........

As you see Dental Marketing with a hyperlink is in a context that is relevant to the keyword...