Characterization is the painting of a character in a story through narrative, dialogue and action. Done well, the character will come to life on the page as if they are a real person.
Done poorly, and the author has succeeded in creating cardboard. And the reader will never forget it.
As Noah Lukeman puts it in his book, The Plot Thickens, "...character is the basis for all further talk of journey, conflict, suspense—and is the cornerstone of plot..."
Characterization is achieved by the author through the careful delivery of external (descriptions of how the character looks, walks, drinks their coffee) and internal information (how they act in any given situation, who they interact with, the decisions they make, the decisions they don’t make). Note that these do not break down the same as internal and external dialogue.
Nouns and verbs chosen for dialogue directly affect the intensity of tone and the reader's perception of the character. These words can reveal whether the character is dominant or submissive, passionate or dispassionate.
Also, the choppiness of dialogue sentences and whether the character speaks complete sentences may tell the character’s attitude or even education level. Consider how terse dialogue is spoken by a character who is combative, how sensitive phrases might be used by a caretaking character. Doing the reverse can be even more interesting. Consider how jokes from a bank robber make his/her character more interesting.
Remember: In fiction, what they say IS who they are. Even and especially when the character is lying.
