‘Featured Images’ are images set to represent a Post, a Page or a Custom Post Type. Where a featured image actually displays on your site is determined by the active theme.
The ‘Set Featured Image’ link can be found in the ‘Featured Image’ module of the Post or Page editor. Clicking ‘Set Featured Image’ will open the a drag-and-drop media uploader or you can click ‘Select Files’ and upload an image from anywhere on your hard drive. Clicking the ‘Media Library’ tab will allow you to select from the images that have already been uploaded to your site.