Short Description: Classical guitarists use their fingers to pick the strings. Folk and Rock artists also prefer to fingerpick. Apart from the visual appeal it gives them unlimited opportunities to improvise. If you use your fingers to pick the strings you get the benefit of picking five strings simultaneously. It's akin to having five picks at your disposal. This added freedom lures all high grade artists to fingerpick while playing on the guitar.
Many classical guitarists assign each finger a letter. Thumb is known as P, index finger obviously is called I and the middle finger gets the name M. A is the ring finger and your little finger is lovingly called C. In case you forget, just remember "Poor Idiots' Memories Are Crap". It's necessary at this stage to know a little more about the six strings of your guitar.
The lowermost string (which is also the thinnest) is called high E. The string just above it (and slightly thicker too) is called B. The strings gradually increase in thickness from G to D to A and the thickest (and nearest to you) is known as low E. Place your picking arm in a gentle loop over the body of the guitar and let your fingers hang loosely curled over the sound hole. Rest your thumb on the string nearest to you (it'll be low E) and let index finger be on G, middle finger on B and ring finger on high E.
Pinkies are usually too weak and short to be of any particular use. Now bend your thumb a little and pick E A and D slowly downward. Touch the strings with the fleshy part of your thumb. After you're through with this simple exercise and feeling reasonably confident, start picking G B and high E with the fingers poised over them. Start to pick downwards first and as you feel more and more at home you can start the upward strokes as well. Don't straighten you fingers while you fingerpick - keep them slightly curled and try to keep the palm as still as possible.
Use only your fingers while fingerpicking and as soon as you've plucked a string pull back the finger - it should never rest on the string. If you feel the sound is too soft, pluck the strings a little harder. What'd you do with your little finger? Some players plant it on the bridge for additional support while others prefer to keep it free. Try out both and choose the one which suits you. It isn't really a bad idea to grow nails on your picking hand. It gives a brighter sound.
Before you spend a fortune on 1-on-1 guitar lessons, be sure to check out Crazy Dave's in-depth breakdown of the absolute best instructional video guitar course on the net - learn and master guitar. Dave's site provides over 35 free guitar licks!