But let's remember that there is no rule saying that you have to invest in other people's businesses. So as equity investors we buy because we choose to share in the risks and the rewards of stock market listed companies.

Some broad strategic guidelines can be useful. Do you want to be a day trader, your eyes glued to your computer screen waiting for a blip in the price to trigger your buy or sell? Or do you want to buy a stock once in a while and hold it for the medium or long term? And are you looking for capital growth as the share price increases over time or are you looking for income from a stream of dividends? Or maybe a mixture of both? These sorts of general strategic decisions will determine your investment direction.

The big players

The vast bulk of private investors buy the shares of well-known companies. These tend to be the biggest companies, listed on the one or more of the major stock exchanges. They tend to be part of the main indices for those particular markets - perhaps the Dow Jones Industrial Average, the FTSE 100, the Dax or CAC or one of the pan European or even global indices.

The great news about these stocks is that they are liquid. There are almost always buyers and sellers of these stocks. So if you want to buy or sell, the market will almost always be able to accommodate you.

The other good thing about big, longstanding businesses is that they tend to pay regular dividends. They don't always do so but the chances are they can provide a modest income. I say modest because such is the demand for these stocks that they are likely to be fully priced most of the time so the dividend as a percentage or your investment is likely to be small.

The small fry

Smaller companies or "small caps" — those whose market value or market capitalisation puts them outside of the main indices — tend to be more risky. Consequently they are not as liquid. In addition their dividends may not be as regular and some of them may not have been in existence as long.

Furthermore their share prices may seesaw up and down in a more erratic fashion than the larger, more stable stocks. On the other hand because of these factors they are likely to be cheaper to buy in relation to underlying assets of the business. They may also be faster growing companies and may therefore offer better share price growth prospects to the private investor.

But the choice is not really about whether to buy big company stocks or small caps necessarily. It's about balancing risk and reward. And it is also about not wavering from the three basic rules of investment — don't lose money, look after what you've got and make as much as you can.

But it still depends on where you are coming from as an investor. If you are betting on the stock market - and let's be clear, buying stocks and shares is a bet on the future performance of the company itself and the market sentiment about that company - for high risk and high reward, you may want to look at your portfolio like a gamble. If you are in it for the long term then you may very well prefer to stick with companies you think you know and understand.

Either way information and analysis are everything. Without a thorough understanding of the business you are investing in, buying a stock is pretty similar to buying a ticket in a horserace sweepstake and has about as much chance of making you money - especially in these times of market uncertainty.

Getting the right mix

So the key to being balanced is likely to be a mix of small and large company stocks. The preponderance is likely to be the bigger companies with smaller, growth stocks to spice up the mix and hopefully provide capital gain.

A spread of market sectors - for example, industrials, financial institutions, construction firms, services businesses - will all decrease the risk of over exposure to one sector of the economy.

And lastly two golden rules - you only make your capital gains when you sell your stocks, so selling is as important as buying. Second, don't buy without thorough analysis and we'll look at some basic analysis tools in our next article.

Richard Willsher is a London-based finance and investment writer. With a background in investment banking he has written for the Financial Times, the Wall Street Journal and is former editor of The Investor.