picture does not show but appears as link instead when inserting media

I am used to using WP and inserting pictures using its URL. In the preview mode, the actual picture would show. However, when using your installation of WP and when I choose to "add media" and picture from URL, a link is inserted into the post instead. Is this what it is supposed to do? How can it be made to show the actual picture instead of a link in a post?

Thanks