What is the best way to add captions? What function do you use to add the text? Do you recommend making the photo smaller or placing the captions over the photos?
Use the "Add Title" function to add a caption. It's located on the left hand side, in the middle of your screen. You can format the text using the "Text" menu, or from the right hand side go to the Title subsection and play with parameters there.
As for making the photo smaller or placing the captions over the photos -- that depends on your preference and what you want to achieve. I have created a long "strip" in Photoshop that is 2500 pixels long by 80 pixels high and has a gradient that runs from solid black (100%) on the left to 0% on the right, and it uses a transparent background. I save it as a .png file to preserve transparency when placed in FotoMagico. When I want to add a caption, I place the strip at the bottom of the screen and place the title on top of it, then slide the strip left or right so that it is dark at the left and fades out to the right. It can be scaled if needed, or a mask applied to chop it off or narrow it down. The text is usually white, and large enough to be readable by the audience. It's prettier than a solid background with text on it, and the image underneath can be seen THRU the transparent strip as the black percentage decreases from left to right. It's somewhat eye-catching. Depending on the length of the slide, or the amount of text, I'll either leave it there thru the entire slide duration, or fade it out after enough time to read it so all that's left is the main image.
Hope that gives you an idea of at least one way to approach titles (captions).