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That's really easy. I posted a quick tutorial on cutting out into shapes. I'll post the link here.
As for the blurred/smudged edges, that's the feather tool. What I do is use the select tool shaped like a circle and select the area I want to cut out, then I go to select>feather and make it around 5-8 pixels. Then ctrl+c to copy and go to a new file and ctrl+v to paste.