Learning how to get more out of Photoshop brings you to a stage where learning the art of layering and masking is essential for any progession to be made.
"What are Layers and why are Masks important?"
Layers are as their name suggests layers, (like the layers of a cakes etc.)
and are used when compositing one image, or set of images, upon another. One
quick example of a layer is to add text to a photograph that says "Happy
Birthday" or "Wish you were here". Photoshop will automatically
create a new Text Layer (a special kind of layer I will explain later). If
Photoshop failed to create a new Text Layer then it's probably because the
image you chose is a locked indexed Color image - First look at the Image
Thumbnail in the Layer Palette, if next to it is a small padlock symbol then
the layer is locked, then click Image>Mode and see if
Indexed Color... is ticked - if it is an Indexed
Color image click RGB Color instead (RGB Color is
the mode you'll need the most when working upon digital art destined for the
Internet). If your aim is to create an image destined for print then chose
CMYK Color instead.
Okay that was a little intensive. So what is this Indexed Color mode and why is it locked? Images that require a fixed colour palette like .gif or .png will save the colour palette information along with the image and when you come to reopen the image it will, by default, be locked but by simply changing it's mode, as explained above, will open the image up.
Okay but what if the image has the small padlock image yet it's Image Mode is not set to Indexed Color? This means one of two things, either the image was saved as a .psd (the native Photoshop file document) and the artist chose to lock that layer or the image is upon a Background layer - If next to the Image Thumbnail the words Background is written then it's a Background layer. Both are easily remedied - if it's a Background layer double mouse click it and the New Layer dialogue box should appear, rename the layer and it will no longer be locked as a Background layer. If it's a locked image layer, look on the Layer Palette where it says Lock:
there are 4 ways in which you can lock your image: Lock Transparent Pixels, Lock Image Pixels, Lock Position and Lock All ensure all the buttons are in their default up/off position and the layer will be freed up.
So what about Masks why are they so important? Masks mask off pixels you don't want visible they hide the bits you don't want seen and when used in combination with layers allow you to build up a composition where areas of one or more images are overlayed upon another image.
Okay I admit that was a long introduction when all you want to do is get stuck into making your own composite image, but it was important to clarify some of the possible problems early so that you are ready to follow the tutorial without being left to wonder how it was done.
New Layer
Creating a New Layer can be done by either selecting Layer>New>Layer...

Shift-Ctrl-N (Windows) Shift-Command-N (Mac)
or by selection the Create a new layer icon on the Layer Palette.

Text Layer
By using the Type Tool (Press T on the Keyboard) Photoshop will automatically
create a new Text Layer identified by it's Image Thumbnail as a large T

The Text Layer is a special layer that handles TrueType and other vector Fonts and unless you aim to stretch the font beyond it's vector capacities, say by warping it into a bizarre shape then it's fine as it is, if you do aim to manipulate the text at a pixel level then you can chose Layer>Rasterize>Type and the type will be rasterize as a bitmap image and you play around with it as much as any other bitmapped image in Photoshop.
Shape Layer
The Shape Layer is another of Photoshop's vector tools you can chose from
a list of preset shapes like speech bubbles, or arrows of different types
and styles or you can build your own custom shape using the Pen Tool
Ensure that you have the Pen Tool's options set to Shape Layer

Then you can draw a vector shape directly into a new layer

As with The Text Layer you can also chose to Rasterize the layer to convert it to a bitmapped layer by selecting Layer>Rasterize>Shape
Background Layer
You can create a a Background layer from an existing layer by selecting
Layer>New>Background from Layerbut remember that a
Background Layer cannot be masked.
Duplicating a Layer
A layer can be easily Duplicated by simply Left Mouse clicking and holding
the mouse button down on the Image Thumbnail in the Layer Palette and then
dragging a copy of it to the Create a New Layer icon.

a small hand will appear to grab the layer and an outlined image of the layer will follow the hand as you drag it to the Create a New Layer icon. Or select Layer/Duplicate Layer...
Deleting a Layer
Click on the layer to select it and then click on the Delete Layer icon on
the bottom of the Layer Palette symbolised as a trash bin, you can also click
drag the layer over the bin in the same way as explained for Duplicating a
Layer or select Layer/Delete from the menu.
Masks
Okay we've pretty much covered the basics of layers so what about masking
as creating layers of images is all very good if the images are already on
transparent backgrounds but no use if all you are doing is covering one image
with another - this is where selections and masking become important. If you
haven't done so already read my tutorial upon Selection
I'll demonstrate masking with a typical b3ta face-swap in Photoshop - firstly I found two images one of dolls and one of George Bush & Tony Blair and dragged the Bush/Blair imageonto the dolls image to create a new layer.

Then I made a duplicate copy of the Bush/Blair layer which I'll explain why later. But now we have two copies of the Bush/Blair image above the dolls image. So that I know what layer I want to work upon I will hide the topmost Bush/Blair image layer by clicking the Layer Visibility icon in the Layer Palette, symbolised by an eye - this is a toggle so it switches visibility either on or off, eye or no eye.

The next thing to do is to make a selection of Bush's head (In the above example I have labelled the first Bush/Blair layer as Bush and the second layer (which is hidden) I've called Blair. Ensure you are working upon the 'Bush' Layer by selecting it in the Layer Palette. Then make your selection using any of the selection methods outlined in my Selection Tutorial.

Once your satisfied with your selection you can quickly turn it into a mask by either selecting Layer>Add Layer Mask>Reveal Selection or by clicking on the Add layer mask icon in the Layer Palette.

Once you have added your mask a new thumbnail appears next to the image thumbnail in the Layers Palette.

This new thumbnail is your mask the white area represents the visible pixels which were selected with your selection the black area represents hidden pixels which were outside your selection.
You can directly paint on the mask itself using the Brush Tool just ensure the Layer Mask thumbnail is selected rather than the Image thumbnail and then when painting with black it will hide visible pixels you paint over and painting with white will reveal any hidden pixels you paint over allowing you to modify your mask directly - painting with grey or any other colour (which will be calculated upon it's grey value) will change the Opacity of the pixels according to it's grey scale dark greys more transparency lighter greys more opacity.
The versatility of a mask over that of cut & pasting to a new layer (Ctrl-J) Windows (Command-J) Mac is demonstrated as the mask allows you to work upon the visible parts of the image while not allowing alteration to the the rest of the image. If at any time you feel that the mask can be done away with you can delete the mask by right mouse clicking the mask thumbnail and selecting Discard layer mask what you will notice though if you chose to do this the entire orginal image will then be visible. Okay on with the Tutorial.
Next we apply the same techniques to the Blair layer this time making a selection of Tony Blair's head - ensure you click on the Layer Visibility icon (the eye symbol) to reveal the Blair layer.

Now you have two floating heads on their own layers, so what we need to do now is stretch each head to fit the size of their respective dolls head. We do this by using the Free Transform Tool (Ctrl-T) Windows (Command-T) Mac.

By pressing (Ctrl) Windows (Command) Mac whilst dragging any Free Transform anchor point will allow it to be moved independent of the other anchor points which gives you greater freedom to manipulate the image to the right shape. if your transform bounding box goes beyond the edges of the image making the anchor point inaccessible don't worry simply select View>Fit on Screen (Ctrl-0) Windows (Command-0) Mac
Once your happy with the size and positioning of your image repeat the transform steps for the Bush layer.

Next we want to add the dolls hair to a new layer above the Bush layer - so click on the dolls layer to make it active, hide the Bush Layer by clicking on the layer visibility icon as mentioned earlier, then carefully make a selection of the Dolls' hair directly under where Bush's head is. Once you have made the selection (Ctrl-J) Windows (Command-J) Mac to paste the selected hair into it's own layer then move this layer above the Bush layer. Using The Free Transform Tool manipulate the hair into shape and position it accordingly. Do the same for the Blair layer and you will see things are coming together. Use of the Clone Tool (S) and Smudge tool (R) will allow you to manipulate the hair to mask the hair of Bush and Blair, then perhaps you might want to use some of the techniques outlined here to bring the dolls' eyes forward to give Bush & Blair more of a dolls look.

The main thing is to have fun, because once you've learnt how then you won't be so reluctant to put your imagination to work.
I've glossed over a few things in this tutorial partially to save space and so that it doesn't take all your time up, but also because the best way of learning is to do it yourself.