If you do a search for "input password watermark", you'll find plenty of examples on this topic. The challange here is to have plain text in place, then when you focus in on the input element, switch over to having the input element with a type of "password" instead of type of "text".
Here is a jsfiddle example i came across.
http://jsfiddle.net/jquerybyexample/TwTt9/
JorgeM
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JorgeM