when there is a problem with the M8, what does the factorg reset do?

Returns it to the state you got it in when you first removed it from its box, which means you lose all your apps, settings and data that's stored on internal storage.

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Returns it to the state you got it in when you first removed it from its box, which means you lose all your apps, settings and data that's stored on internal storage.

Pretty much, except for one thing. If you get OS upgrades through the carrier, a reset will not roll it back to the out of the box state. It'll reset to the current version's default state.

And while the external sd card should be left unaffected, I would still suggest backing up anything you want to it and then removing it from the phone. That's mostly just my opinion, but I'd be afraid of the chance the reset could somehow corrupt the card.
 
Awe I see, I read in a random post that they. Reflash the firmware which cannot be done at home.

That is an option in some cases, but typically a "factory reset" as mentioned around here and other places refers to resetting to a factory state. If you're running stock and nothing is corrupted, that's a simple command that can be done on the phone. If that doesn't work, there are other options actual factories and repair shops can use to force things. That's delving into things that casual users wouldn't be able to comprehend.
 
If you know what you're doing you can reflash your phones software at home.

I've been an Android user since 2010 and have reflashed software, rooted and installed custom ROMs on a number of devices.

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