Lets see if I can simplify this down to the basics:
It’s probably simplest if you stick with Genesis for now, but you do need to be able to recognise which is which. You can generally do that by checking the Additional Information tab of each item in the store. If a character doesn’t list Genesis, it’s not compatible.
The Generations, (usually abbreviated to Gen):
Genesis is the basic 5th Generation figure
M4, V4 and K4 are the basic 4th Generation figures, A4, SP4 and G4 are add ons for V4, F4 and H4 are add-ons for M4.
M3, V3, A3, H3, SP3, D3, Freak, the Girl, Luke and Laura, Matt and Maddie, and the Millennium Baby are the basic 3rd Generation figures
You don’t need to bother with the old 1st and 2nd Gen figures.
You also see figures referred to as: V3/4/5: Victoria, Vickie; M3/4/5: Michael, Mike; A3/4: Aiko; H3/4: Hiro; SP3/4: Stephanie, Stephanie Petite; D3: David, F4: Freak, G4: Girl
The 3rd and 4th Gen figures needed morph packs to change shape for different characters, these were sold separately.
5th Generation Characters
Genesis can do male and female shapes, and young kids, without any add-ons.
The Genesis Evolutions Head and Body add additional shape changing capability, as do the Ethnicity packs. I’d say Evolutions are essential, Ethnicity fall under nice to have.
V5 and M5 are optimized male and female shapes for Genesis. They’re essential if you want to use V5 or M5 character packs.
Some of the Genesis characters just use basic Genesis, others need you to own V5 and M5, it should tell you on the store page, generally a V5 or M5 character will explicitly state it as part of the name.
One thing that may make you look at earlier generation figures is if you are want to use pre-teen and teen figures. The default Genesis and K4 child figures are much younger. There are a handful of teen characters for V4/SP4, but otherwise you may want to look at Luke and Laura.
Genesis can also use character shapes from earlier generations via the Generation X tool (aka Gen X), Gen X needs you to own the Gen X shape pack for that earlier generation figure before it can convert it for Genesis. Gen X shape packs are available for the Gen 4 figures and the Gen 3 adult figures, but not Luke and Laura and Matt and Maddie.
Genesis can use character textures (aka MATs, Maps) from 4th Generation figures without any extra tools being required. It can only use textures from 3rd Generation if they are converted to 4th Generation, which needs the Texture Converter 2 tool and the appropriate add ons for it.