If it's a png file you use the alpha channel and set it to transparent.
If it's a swf file the transparency will be automatic.
How did you make your watermark? If it's jpg it will not be transparent.
On another thread some BIZ people say they have had trouble getting watermark to work.
U need to make your watermark into .png, it preserves the transparency.
I've uploaded 2 watermarks and neither one became available for use.
But I've seen a couple of users with their own watermark... J Files Graphics and Mr Crankaterous - sorry I am not sure of the spelling of this last one - have their own...
http://tinychat.com/rookieo6 were celebrating oympics