You have two possibilities to watermark images.
1. Watermark automatically
Go to Admin/Configuration/Setting/Display settings, Image, AddToCart tab, then choose Watermark (automatic) tab.
You can watermark images with text and/or image.
The default Watermark Image is ac_logo.png. To use you own image, simply upload it to the /image/watermark directory.
Set the position, margin text colour etc. then save your setting by clicking on the Save button in the task bar.
Every image that you upload will be watermarked automatically from now on with the text and/or your image.
2. Watermark manually
Go to Admin/Catalog/Watermark
Below the Image to Watermark and Watermarked Image Preview boxes you will find the same setting possibilities mentioned above. First you have to change your settings according to your requirements then save them by clicking on the Save button.
Now you can choose the image that you want to watermark.
Press the preview button. If you are satisfied with the result simply click on the Save Watermarked Image button.
If you are not satisfied with e.g the position on the text, change it as mentioned above. Do not forget to save your settings again.
Repeat these steps if needed.