When someone is speaking, put his/her words in quotation marks.
A new paragraph begins each time the speaker changes.
The first word within quotation marks is capitalized except for when a sentence is interrupted by a tag (he said, she said) and then picks up again after the tag.
Punctuation marks vary with dialogue. Commas are used before tags (whether the tag is placed in the middle or the end of a sentence). A period is used at the end of sentences without tags. Question marks and exclamation points are used in occasions when they are appropriate. The tag that follows them is not capitalized.
Description that accompanies dialogue should be placed in the same paragraph as the dialogue.