All images are actually a rectangle (square) but if they appear to be some other shape that is because every area except that shape is transparent. Only some formats respect transparency. The native format of Photoshop Elements (.psd) will support transparency and so will Tiff and Gif. I believe there is one other also, perhaps .png. Jpg does not.
To make an oval shaped image, one way to do it is;
* make sure you drag the Layers Palette out of the well (grab the tab and pull it down to the work area)
* on the one layer showing in the Layers Palette, double click your background layer to unlock it and have it become a regular layer
* duplicate your background layer
* you now have two layers in palette
* click on the eye on the bottom layer to temporarily make it invisible
* click on the top layer to make it active
* get the elliptical marquee from the Tools Palette (it might be hidden behind the rectangular marquee, if so, rest your cursor over the rect. mar. and choose the ellipse from the fly out)
* start dragging the tool from the top left diagonally where you want your selection to be
* to move it around a little after drawing it, keep cursor inside lines and drag
* if you need to redraw, press Control and the D on the keyboard (Ctrl/D) to remove selection lines and begin again
* when satisfied, go to Select>Inverse>Delete
* everything outside of your lines will be erased to transparency
* if you wish to feather the selection, after you draw it choose Select>Feather and type in the amount
* you now have an oval shaped image
* go to Save>Save As, choose the .psd format and name it
NOTE: you could do this also by; after creating the oval shape, (no need to delete the area around the ellipse) go to Edit>Copy and then create a new blank document and with it active, go Edit>Paste.
Come back is you have another question.