This is one of the most common questions that an author asks themselves. It also is one of the hardest questions to answer because character is determined by those who interpret the context in which the character is scribed. Some might follow the traditional values of character -- giving a character a type and a role within the story. While others might use the modern notion of character -- basing a character off from the observations of other people.
Writer's Digest has an article written by Nancy Kress that depicts four simple exercises for coming up with great characters for a novel, novelette, short story, flash fiction, etc. The title, Creating Characters: 4 Simple Exercises, lists the following methods: write miniature bios for your cast of characters, draw upon the news for inspiration, exploring character arcs, and recasting a classical character.
Writing a miniature biography for each of your characters is an excellent place to start. There is no need to get into too many details with this exercise. Simply write down the basic concepts of your characters (age, name, occupation, and personality). This gives you the roots of your character and allows you time to consider what role each character will play within your story. While this exercise may lend itself to creating characters that are plot driven, I personally find that making your story being character driven is much better.
Have you ever sat down to watch your local news? Sometime there are some interesting facts about events and people that can help inspire characters for your own story. For some authors making character concepts is as easy as taking candy from a baby, but for other writers they may have to do their homework. Research is something a lot of authors do to create their stories and characters. The environment in which a character lives really can drive their emotions and personalities. I recommend this exercise for those who are writing a non-fiction piece.
Draw up some maps for your characters. Exploring character arcs is something like drawing a story tree for your characters. Writing a few tidbits about your characters in the beginning of the story, and then writing a bit about them towards the end of your story, is a great way to analyze how your character is going to change throughout the story. One of the most challenging writing practices is making stories where the characters develop throughout the story. Nobody wants to see a character that is the same all throughout an entire novelty. They want to see struggle, they want to see emotional twists. Character arcs is a great way to capture the essence of your characters.
Finally, why not re-imagine a classical character like Robin Hood or even Julius Ceasar? Those characters have some great concepts of their own, and the best part is that half the work is already done for you. I'm not saying copy the characters completely. I'm saying try re-imagining Robin Hood if he were not the good guy, or imagine if Julius Ceasar hadn't died. This helps a writer grasp some different concepts of original works that people are already familiar with. It is these kinds of connections that can help your own characters become memorable. While I don't condone this method as much as the others, it definitely can help an author relate to their characters.