Media module requires file_entity module. Lets download all of them and enable media_watermark module. After installation you should follow this path yoursite.com/file/add. There you will see this form with "Add watermark" checkbox.
If you will check it you will see select list with two fully functional watermarks. They were added while module has been installed.
Please choose appropriate watermark and file to upload (jpg, jpeg, gif, or png).
To edit existing watermark just click on its image. You will be on watermark edit form as shown on picture below.
There you can change Watermark image. As watermark you can use any png and gif image with transparency. Also you can put appropriate watermark name and position where it will be applied.
If you want to manage all existing watermarks please follow this path yoursite.com/admin/config/media/watermark. If you will forget this path you can always find it on modules page yoursite.com/admin/modules.
So using this path yoursite.com/admin/config/media/watermark you will see all your existing watermarks.
As you can see on picture above there is Add watermark link, you can use it to add new watermarks. Also as you can see in table above are edit, delete link and all other watermarks parameters. So good luck! Please use media_watermark and enjoy!