Firstly, a couple of definitions:
This is a link to an image elsewhere on the internet.
http://www.flickr.com/photos/28702406@N06/6098907159/
This is the same image embedded inline in a thread.

Southern Pacific cab forward on RS Tower by GloriousNSE, on Flickr
(Brian Moore image shot on RS Tower, 2011)
Linking takes you to the website where the image is hosted to view the image, embedding it inline means the image is still hosted on the website it's on, but appears within the thread.
There is a third way where the image would be uploaded to this website and hosted here, but that is presently not enabled on this site. If that changes I will let you know.
Important Legal Stuff...
Under UK law images, video or other 'creative media' are inherently classed as copyright material, with their creator being the copyright holder, that applies to all such media unless they have signed the right over to another party and is irrespective of whether the person who created it will get upset or not.
Please do not embed images inline if the copyright holder has not given you permission to use the image, that is illegal. You may link to a website where such an image is already hosted however - make sure you link to the website page (as above) and not directly to the image.
Some websites (such as Flickr or YouTube) have user settings where the owner of the image can decide whether to allow their images to be shared in such a way as it provides a credit and link, in which case you may assume they allow that use of their image without specifically asking.
If it's hosted on another website please do not embed it inline unless the site in question allows you to do so - that is regarded as 'bandwidth theft' - basically their website is being charged the costs of their image appearing here. If the website has a mechanism allowing it to be shared (as Flickr and YouTube do) then you may assume the website allows that action.
Stay tuned for a 'how to'...