So first off, select your base and all that jazz Mess around with the coloring and stuff as much as you want, since I usually save this step till the very last. But for the purposes of this tutorial we're just going to leave the base the way it is



To start the circle forming process, take a smaller version of the image you'd like to use in the circle and paste it on a new layer. I almost always use a smaller version of my base image but you can always go with something else, of course Move the smaller image around until you have it in the general area you'd like your final circle image to be and then drag this layer below all your other layers. Since it's now your bottom layer, you shouldn't be able to see your small pic and the base should look totally unchanged.



There's a cap of what your layers should look like at this point Ignore the fact that I have the visibility unchecked on the top layer, I dunno WHAT I was doing but you need it VISIBLE for the next step

Now lower the opacity of your base image so that it is semi-transparent. It doesn't have to be a set opacity, just anything below 90% or so works pretty well. So here is what your image should look like:



So now you can see your tiny pic layer on the bottom ( I believe I lowered the opacity to 75% here)

What I do now is take my Eraser tool and take a round brush with CRISP edges (not BLURRED) and erase a hole on my base layer over the tiny pic, therefore exposing my bottom layer. Usually just one click should do it (just make sure your opacity for your eraser tool is at 100% ) and set the opacity of your base layer back to 100%



Viola! You've created a circle within your picture!



This is what your layers should look like--keep in mind that if you have layers above your base that effect things such as coloring and stuff like that, you may need to erase on those layers as well.

To make it stand out, I usually desaturate the bottom layer and make the tiny picture black and white. I then turn on the Drop Shadow effect on my base layer (click the tiny F within a circle button at the bottom of your layer palette) to make the circle have a bit more definition, so it isn't just blending right in with the pic.



And that's pretty much it This is just the basic way to create this effect, you can definitely go above and beyond and get really creative with your circles by playing around with effects and coloring, whatever you prefer I hope I helped and go have fun kiddos