1) Login to your magento admin panel
2) Go to > System Configuration
3) Click on 'design' in left menu
4) Open the tab 'Product Image Watermarks'
Upload a GIF image.
Base Image Watermark is your main product image.
Small Image Watermark is the image on the listing pages.
Thumbnail watermark is the additional product images as well as anywhere else a thumbnail image appears.
5 ) You must clear you image cache for this to work.
Go to > Settings > Cache Management
Click on 'clear' beside 'images cache'