Use the Horizontal Type and Vertical Type tools to create and edit text. The new text you type is entered in a new text layer. You can create single-line text or paragraph text. Each line of single line text you enter is independent—the length of a line grows or shrinks as you edit it, but it doesn’t wrap to the next line. To create a new line of text, press Enter. Paragraph text wraps within the paragraph boundaries you specify.

Single-line text (top of image) and paragraph text (bottom of image).

You can use the type mask tools (Right-click the Type tool) to create a selection in the shape of text. You can then create different effects and cutouts with the text.

Clicking in an image with a type tool puts the tool in edit mode so you can enter and edit text. You must commit changes to the type before you can perform other operations, like selecting menu commands. The Type tool is in edit mode when you see the Commit button  and Cancel button  in the options bar.

Note: When you add text to an image that’s in indexed color mode, Photoshop Elements does not create a new text layer. The text you type appears as masked text.