Last month, I took a great improv class at Second City where we focused on creating characters - something that has to be done relatively quickly when you enter an improv scene.
One approach is to start with character traits and add additional layers.
I like to think of it as a series of overlapping circles:

I’ll go through the layers one by one:
1. Traits - Qualities that are core to a character which change very slowly. For example, if someone is generally a confident person, they are probably not going to become predominantly and consistently meek in a matter of minutes. I think when improv coaches say “hold onto your shit,” I think they mean don’t abandon your core character traits when reacting to another player’s line or actions. Photoplayer Hater has a good list of traits for you to practice.
2. Emotions - What the character is feeling right now. For example, even a confident character can feel happy, sad, mad or afraid at any given moment. Emotions can change during a scene. I’m not really sure how often they could/should change, but welcome your opinions. Wikipedia has a good page on emotions for you to practice.
3. Who/What - What role is the character playing right now? What activity is she engaged in right now? What does she want right now? Sometimes characters can play multiple roles at the same time. For example, a generally confident cop may also be a mother who is cooking dinner while trying to get her son to do his homework because she’s worried about being a failure as a mom.
4. Surface - These are all the external qualities that the other characters and the audience can see. How does this person talk and move? How is this person dressed? What objects do they use? For example, a confident German cop will probably talk, move and dress differently than a Texas State Trooper.
To create characters during an improv show, some improvisers start with physicality. Some start with emotion. Some start with object work. Starting with a character trait is another option.
For example, as you step on stage, you could just say the word “proud” to yourself and simply start moving like a proud person would. Then discover the rest as you go.
Another way to get better at creating characters is to practice on your own so that you have a set of character traits in your toolkit ready to go before you step on stage. One way to practice is to think of the traits of people you know, famous characters from movies or TV or people you see on the street and simply act like them as you do “normal” things in the course of a “normal” day.
There are a lot of improvisers who would consider my last point to be heresy because they think you should walk onstage with absolutely nothing.
My personal perspective is that even though I’ve gotten better at yes anding, if I go on stage with a completely blank slate, my scenes aren’t as interesting. So, I’m going to practice and build up my toolkit of traits.
Besides, having a strong character is one way of giving a gift to your scene partner by “taking care of yourself” (as the Annoyance Theater likes to say).
In future posts, I’m going to expand upon this topic by exploring individual traits as well as practices to help you embody them on stage.
In the meantime, please feel free to comment and offer alternative points of view. I’m a beginner and still have a lot to learn.
Have Fun,
Yes Man