To recap: you've gone to images.google.com and clicked on the camera icon in Google Image Search. That should open up a box similar to what you see in this screen capture. Notice that it is offering you three ways to search by image.
The first method: paste the URL of an image in the window. This is handy if you have a Flickr image or someone has been tweeting a meme. Find the URL of the image itself. You can usually get this by right-clicking on the image and selecting "copy image URL." Note that Google won't search by image if you paste in a URL for a private website, so this won't work to find the origin of that Facebook meme, for example.
It will work if you download that image from Facebook first. (On a side note, if you're downloading images people have shared privately with you in Facebook, please be mindful of how you use those images.) That brings us to search method number two. If you have an image on your desktop, you can drag the image into the search box. This works well in Chrome. It may not work at all in IE.
If dragging doesn't work, you can use method number three and click on the Upload an image tab. Once you do that, you can browse for an image on your desktop.
What does a reverse image search on Google Images tell you?
It depends on your source image. For example, you have a picture of an animal you shot with your camera on your desktop, and you have no idea what this animal is. You can try a reverse image search, and Google will attempt to find similar images. You might be able to identify your image. Sometimes you may even get results complete with a Wikipedia entry on the subject. Other images will pull up news stories or things that Google determines to be similar subjects, "cute baby animals," for example.
Things Google Search by Image Can Help You Find
Shoes. Hey, don't knock this idea. If you find a picture of a pair of shoes that you adore but can't identify, try doing a search by image to find a similar pair. You can usually find a place to buy similar shoes, and sometimes you'll even find an exact match for the shoes you were seeking. The same goes for coats, hats, or other consumer goods.
Fact Checking. There's always some picture of questionable origin circulating on Facebook or Twitter. Check it out. Is that picture of a guy in a burnt out building really from the Ukraine just now, or did it come from an old picture? Do a search by image and check out the dates. Do they match? You might even be able to find the origin of the photo.
Bug or Animal Identification. This is huge in the summer months. Is it poison ivy? Was that really a coyote? If you have a picture, you can do a search by image. You may have to experiment to find the best sorts of pictures for this use.