How to know what companies to invest in? This is a question many people will ask. When choosing which companies to buy, we need to know their competitive advantage against other companies. Investopedia defines economic moats as: “The competitive advantage that one company has over other companies in the same industry. This term was coined by renowned investor Warren Buffett.”

An economic moat is like a company building a fortress. By having a competitive advantage, firms can continue to have profits in the long run. As a shareholder of a company, you’ll also want the company to continue generating profits and cash flow. In this way, the share price can continue rising and dividends will also increase with it.

Category of Industry Competition

In economics class, we learn that there are basically 4 different types of industry competition:

1) Monopoly
2) Oligopoly
3) Monopolistic Competition
4) Perfect Competition

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