In terms of actual gameplay and how Materia effects battles, it is split into five different catagories. There is Support Materia, Summon Materia, Magic Materia, Command Materia, and Independent Materia. Support Materia is blue in color and generally used in conjunction with other types of Materia as a support or add-on. Summon Materia is red in color, and is used to summon powerful monsters in battle to defeat the enemies. One thing of note is that most Materia, depending on the power, function and strength, will provide benefits in certain aspects, and negatives in others. For example, a Materia might give +2% Strength, but -3% HP. Summon Materia, due to it's strength, generally gives rather large negative effects as a counter-balance.
Magic Materia is green, and provides both offensive and defensive support. Depending on the type, it could allow you to deal damage to an enemy with fire, lightning, and many other elements, while other types of Magic Materia can be used to heal part members. There is even Magic Materia that allows the slowing down of enemies or the speeding up of allies in order to act faster. Command Materia, yellow in color, provides new command prompts to appear on the battle screen when selecting moves. An example of this is the “Double Cut” Materia, which replaces the “Attack” prompt with “2x Cut”, and when used, allows the character to deal two hits as opposed to one.
Finally, there is Independent Materia. This Materia is a purple color, and has a wide range of uses. It can vary from giving the specific party member that it is equipped to more EXP at the end of battles, raising HP by a certain amount, to even breathing underwater, which is rather useful for a specific fight extremely late in the game.
In conclusion, the Materia system of “Final Fantasy VII” is a core element to the game as well as the story itself. There is a large amount of possibility and combinations that can be done with Materia, which brings about a very diverse and unique experience with every playthrough of the game.