Part One: The Bullet List.
This will likely be a long series of posts, spread out over several days, as good dialogue is definitely one of the most important elements of writing fiction. I'll try to break up these posts into smaller bites, as there are many facets of dialogue, and each can include an important hint or two.
To start off, though, let's just take a look at the punctuation requirements of dialogue as it appears in novels or short stories. It sounds like I'm addressing something obvious, I know, but if we're going to do this, let's do it right. And the easiest way to do it, I think, would be through a bullet list. Yes, you caught me: I enjoy putting together a good bullet list.
1) Each time a character is speaking in a novel (whether it's a single sentence or a single paragraph), what he's saying should be enclosed in quotation marks.
2) Any punctuation that ends the sentence should be included WITHIN the quotation marks. Examples: "That's not what you said yesterday!" "Are you sure that's what I said?" "I was thinking . . ."
3) If a character's ongoing dialogue is lengthy enough to be broken into two paragraphs, the end of the first paragraph should NOT include a closing quotation mark. The next paragraph should BEGIN with an opening quotation mark, and if that character's dialogue ends with that second paragraph, a closing quotation mark should be included at that point.
"There are a lot of things I can say about the development of the first record albums, but I think what's most interesting about them is the fact that they used to be made entirely of banana skins.
"However, because I have been found to be legally insane, anything I say about record albums should be completely ignored and discounted as false."
4) If a character quotes another character or a famous movie line or whatever within his line of dialogue, that quote should be included with SINGLE quotation marks within his original double quotation marks. Phew. Example: "Was it Mark Twain or Ted Nugent who said 'I have not yet begun to fight?' I always get mixed up on that one."
5) Although it can be done—but is almost always confusing when it is—avoid having two characters speak within a single paragraph. If they're carrying on a conversation, each character's dialogue should warrant its own indented paragraph and each should be punctuated properly.
6) If a character trails off in mid-sentence, as people so often do in real life, use ellipses at the end of his dialogue to indicate this. Example: "I wish I knew what to say, but . . ."
7) If a character is interrupted before he can finish his line, use a dash at the end to indicate this. "I swear, if you interrupt me one more time—”
8) If you're including an indicator at the end of the sentence, and it's not a question or doesn't require an exclamation point, end the piece of dialogue with a comma. "I don't think he wanted to be interrupted," she said. In the case of a question or a shout, the proper punctuation should be used, but the he or she that follows should not be capitalized. "Can you believe that crack about banana peels earlier?" she asked. "I know. And I hate banana peels!" he shouted.
9) If you're identifying the speaker HALFWAY through his line of dialogue, you should end the first half of it with a comma and closing quotation marks, include your identifier with a comma after the word SAID, and begin the second half of the line with an opening quotation mark. Do not capitalize the first word of the second half of the dialogue. Example: "You guys can talk about record albums and bananas with him all you want," John said, "but I think that guy's crazy."
10) Lastly (unless I think of more later), if you're indicating who is speaking BEFORE the dialogue, you should begin the first word of the dialogue with a capital letter, and punctuate the line by including a comma after the word SAID. Example: Bob said, "Well, I happen to love bananas."