Dynamic SQL in PostgreSQL allows developers to streamline querying processes and reduce repetitive tasks. It is implemented using the EXECUTE statement, which evaluates a string input. Dynamic SQL can be used for executing DDL statements, such as analyzing tables within a schema, and for DML statements, enabling interactive data manipulation, like filtering results in a billing application. PL/pgSQL caching can lead to inefficiencies in dynamic SQL scenarios where execution plans vary. Security risks, particularly SQL injection vulnerabilities, are associated with dynamic SQL. Recommended practices to mitigate these risks include using the USING clause for parameterized statements, employing the format function for query construction, and utilizing functions like quote_ident() and quote_literal() for proper formatting.