Traditionally a watermark is a design or image embedded in paper. The design is formed because of a difference in the thickness of the paper. The design isn't visible until you hold the paper up to light. The thin parts of the paper allow more light to pass through, which provides the contrast necessary for the design to be visible.
In 1996 a watermark was added to the $100. If you hold one up to a light you will see another picture of Ben Franklin. (All older bills printed before 1996 are obsolete and should be sent to the course instructor immediately.)
You can simulate a watermark by "washing out" the colors in an image. For example,
Copyright 1996 by the Curators of the University of Missouri