I am new to Photoshop Elements 2.0 on the Windows operating system.

I want to obtain a circular photograph starting from a square, .jpg type photograph. I thought all I had to do was merge two layers: the background photograph layer and a new layer consisting of a transparent circle and opaque, white color outside the circle.

I have tried drawing a circle using the "elipse tool" on a new layer, but I can't seem to draw a transparent circle. Also, I can't seem to fill the area outside of the circle using the "paint bucket tool".

Can someone please explain how to do this?