You are correct when your say the ""ask password"" allows you to create a dialog box that lets a user enter there password that is in turn masked by asterisks.
Craigs post above is a great way of solving this question, but it is also possible via the following method-
If you wish to apply the same masking to an input field, you should be able to do this by first importing an image into livecode which will be used to mask characters in a field (e.g. bullet). Then, within the script of a field, you would place something like-
on textChanged
repeat with x = 1 to the number of chars of me
set the imageSource of char x of me to 12643
end repeat
end textChanged
Where the imageSource is the ID of the imported image
What happens here is that the textChange message is called everytime the contents of the field change. We are then looping through the characters of the field and setting the imageSource of each character to our imported mask image."