Templates are just a group of XML, PHP, HTML and image files that are stored in the templates directory of your site. You can edit these files or you can use the editing interface available in the Template Manager.
Before you start hacking away at a default installed template, remember that any updates of the Joomla core files is likely to contain new copies of the default templates. Unless you take steps to protect your work, your modifications will be lost.
There are options in the Template Manager to Duplicate and Copy an existing template. Note that you are only copying the style of the template and you are not protected from overwrites. There is simply another entry made in the _template_styles table of the database. The template files are not duplicated into another uniquely-named directory and they will be overwritten during an upgrade.
For example, consider the case in which you Duplicate the Protostar template in the Template Manager and then modify the /templates/protostar/css/template.css file. A Joomla upgrade is likely to contain a full set of those Protostar template files. Your changes will be lost.
Create a new template by copying an existing template:
<param name="theme_header" type="folderlist" directory="templates/my_template/styles/header" default="" label="Header Themes" description="HEADER THEMES DESCRIPTION" />
<param name="theme_background" type="folderlist" directory="templates/my_theme/styles/background" default="" label="Background Themes" description="BACKGROUND THEMES DESCRIPTION" />
<param name="theme_elements" type="folderlist" directory="templates/my_theme/styles/elements" default="" label="Primary Elements" description="PRIMARY ELEMENTS DESCRIPTION" />
In the Administrator, select Extensions > Template Manager. Now select Styles or Templates. Select the template you wish to modify.
CSS stands for cascading style sheets. This controls many elements of the look and feel of your site. HTML is the file that controls where positions are defined and placed. Other than that, it should be noted that, with a few exceptions, what is in the .css and what is in the HTML files largely depends on the approach of the template designer.
One common change is to use your own graphic/image. Graphics are linked to the HTML file. Simply change the reference to the image of your choice. Keep in mind that if it is a different size than the original image this may change the appearance of the site in unexpected ways.