Materia. Special orbs containing immense power which can be unleased by whomsoever possesses it. In the world of Final Fantasy VII, it's the only way to extend the party's skills beyond hitting things with sticks. Importantly, it is the materia itself that contains the power, routed through its user. Characters are incapable of learning skills, and must rely on the shiny balls in battle.
To do this, they must equip their chosen materia into special slots on their weapon or armour. That's all there is to it, and the abilities offered may now be selected in battle. Remove the materia, and the abilities vanish. Although most things don't care whether they're in a weapon or a piece of armour, some elemental or status-based skills differ depending on their location.
There are basically five types of materia, differentiated by colour:
Red: Summon
Red materia is for summoning, and allows its owner to call upon the help of powerful beasties to destroy their enemies. This can be done using the Summon menu in battle, but it requires hefty amounts of MP.
Green: Magic
Green materia contains the arcane secrets of spellcasting, and is the most common type found in the world. Equipping it adds commands to the Magic menu. Most green materia has more than one spell inside, with the later ones becoming available as it levels up (see below).
Yellow: Command
Yellow materia focuses on adding commands to the battle menu itself. It offers a wide variety of skills, most of which cost no MP to perform.
Purple: Independent
Purple materia stands alone, providing some unique ability to either its owner or the party as a whole.
Blue: Support
Blue materia is where the money lies, useless on their own but extending the capabilities of other orbs. If placed in a slot linked to another materia, it will enhance it in some way. If multiple support materia are linked to copies of a single orb, it gains the combined advantages of all of them.
Leveling Up
After each battle, a certain amount of AP is gained by each party member. This AP is given to every piece of materia they own, which may eventually result in them leveling up. Leveled materia usually offers a greater variety of commands, or increases the effectiveness of one.
Once materia reaches its final level, it becomes mastered and can go no further. In the process, a new orb is born from it and the cycle begins again. Mastering materia generates only one new orb, so selling the child may make it impossible to ever acquire more of it. It's perfectly safe to sell mastered materia as long as there's a child remaining to continue its legacy.
