Everything your character does in the game has a chance of success or failure. Having a higher skill value for a particular task, improves the chances of success for that task.
Every character has a certain level of skill in every possible skill. Think about it. In real life YOU have a certain level in every skill - even skills you have never heard of. If you have never heard of a skill, you probably have a pretty low value, but it IS a value.
It would take forever to try to figure out the levels for every possible skill in the world - trust me - I have seen RPG systems that have tried. Instead, the character should be assigned an explicit level on a small set of skills that you as the player deem important in defining the character. All other skills will use the Default Value for that skill, when and if an opportunity arises to require the use of said skill.
BUT… not all skills are equal when it comes to defaults. Some skills are pretty easy for anyone. Some skills take a lot more expertise, training, special knowledge, or background.
Here are a few examples of Default Skills:
Skills also apply to weapons. (Combat is slightly more complex than a simple Skills check, because it also factors in weapons bonuses and the opponents armor, but it is really just a glorified skill.) The Weapons default skills are listed in the weapons tables.
a few more examples of skill defaults can be found here, but it's really meant to be a conversational process between you and your GM.
When creating a character, you will want to spend some XP to give her certain skills above their default levels. One character may have higher skill levels in “stealth”, “lockpicking”, and “pickpocketing”, while another character may have higher skill levels in “brawling”, “martial arts”, and “climbing”. The combinations are infinite and even the skills themselves are up to the discretion of your GM as far as what skills are possible. If you don't see the one you need, make it up!
Optionally and at your GM's discretion, you may also choose to DECREASE a few skills by lowering a skill below the default value in order to trade in for extra XP to spend elsewhere. Thus, you can simulate a character who is particularly bad at something (for example, sucks at math, terrible at baking, etc) which a clever GM could use to lead to fun and interesting scenarios.
As you progress through the game, you will be awarded XP. You can spend XP to purchase Skill Upgrades. Pay 10 XP to increase one skill by 1 point.
Some skills require a high degree of training and specialization. These skills have a default level of ZERO. In other words, you have no chance of success unless you have spent XP to obtain the skill. Pay 10 XP per skill point, during character creation, or during game play.
Each item crafted (potion, poison, jewel, sword etc.) will have a certain difficulty level which will scale with the value of the item. See specific skill pages (listed above) for details.