Linear and rotary encoders can be separated into two main groups: absolute and incremental encoders. The construction of these two types is very similar, but they differ in physical properties and the interpretation of movement.

An Incremental rotary encoder is also referred to as a quadrature encoder. This type of encoder utilizes sensors that use optical, mechanical or magnetic index counting for angular measurement.

An absolute encoder contains components also found in incremental encoders. They implement a photo-detector and LED light source but instead of a disk with evenly spaced lines on a disc, an absolute encoder uses a disk with concentric circle patterns.

A linear encoder is a sensor, transducer or reading-head linked to a scale that encodes position. The sensor reads the scale and converts position into an analog or digital signal that is transformed into a digital readout. Movement is determined from changes in position with time. Both optical and magnetic linear encoder types function using this type of method. However, it is their physical properties which make them different.

A magnetic encoder consists of two parts: a rotor and a sensor. The rotor turns with the shaft and contains alternating evenly spaced north and south poles around its circumference. The sensor detects these small shifts in the position N>>S and S>>N. There many methods of detecting magnetic field changes, but the two primary types used in encoders are: Hall Effect and Magneto resistive. Hall Effect sensors work by detecting a change in voltage by magnetic deflection of electrons. Magneto resistive sensors detect a change in resistance caused by a magnetic field.

A commutation encoder contains the same fundamental components as incremental encoders but with the addition of commutation tracks alongside the outer edge of the disk for U/V/W output.