A collision domain is a point in the Ethernet network where a collision is most likely to happen. These points are usually at the segment points in an Ethernet network. A collision domain also refers to a system where a unique identifier is open for multiple interpretations over different layers.
An example would be a traffic stop sign. At a four way stop with one car at each stop sign, each driver has to determine who goes in what order. This is the point where the traffic is left up to interpretation. If two cars try to go at the same time there could be a collision. This is where the CSMA/CD steps in to direct the traffic and each of the two cars would wait a few seconds to see who will go first. Then they would both try again.
These points are typically found in a hub or repeater environment. These are where each host segment connects to a hub that represents only one collision domain within one broadcast domain. These collision domains can also be found on such networks as wifi.
One way to eliminate the possibility of a collision happening is to use switches these switch points now become their own collision domains when using half duplex. When full duplex is used, collisions are entirely eliminated.
So in essence these switches become a traffic light instead of a 4 way stop. There are only two signals green for go and red for stop.