As you progress in the game you gain new equipment. Usually it is easy to compare two items and pick the more useful one. But remember about few things. Don't focus on helmets, they give no bonuses to your character. You have only one field for two item types - on your neck you can only wear amulet or robe.
Howe to gain best equipment? There are two ways - first is completing successive quests. As you progress in the storyline you will be rewarded with better equipment. Second way is buying needed equipment. Merchants have very good equipment even at the beginning of the game, although their prices vary from 8000 to 14000 coins. Good thing is, such expensive item will be sufficient for the rest of the game. Don't waste money on middle-class equipment.
Keep attention to items for specific class, like for paladin or wizard. They are usually very good and offer specific, most needed for that class bonuses. Such items can be found in few places in the game world, you can also simply buy them - but their prices will be even more expensive.
Your main character has one additional slot for your pet. It might be, for example, a cat, dog, pig or even small snake. Animals are gained in various ways, some of them can be bought in inn, others are rewards for quests, and the most interesting ones can be found while traveling through the game world. They serve no purpose except showing on the map and being a friend to your party.