Stories definitely add to the word list of kids, especially toddlers. However, beyond vocabulary, stories largely help develop their language skills; even when they are barely two. With illustrative storybooks, they know what things are called; a primary step in developing association with the visible and non-visible things around them.
Stories are filled with a variety of characters; big and small, skinny and fat, young and old, quiet and loud, animals of different shapes, sizes, and colors, and much more. All of these form several descriptions, expressed through words. This helps young minds gradually build a relation between these differential concepts.
Benefits of storytelling for children include the fact that it gives them a chance to create their own world of imagination. They start building upon the pictures they see in the book, and the sounds and tones they hear from the storyteller. Stories, either read out from books or from one's experiences, power creativity among children.
Once children get into the habit of listening to bedtime stories, they begin to create an audio-visual cartoon strip in their mind. This involvement makes them ask questions about the characters, their behavior, or the context. This naturally leads them to knowing more about their surrounding world, the people living here, different places, and different ways of living.
It is stories and fables that introduce the little ones to the commonly accepted cultural ways and norms. Although, trying to teach them morals with every tale is not welcome at all. But, grandparents narrating simple memorable experiences of their childhood, or sharing a few funny memories of the child's mother or father gives the child a perfect glimpse of several social aspects.
Storytelling aids the memorizing process for toddlers and preschoolers without a conscious effort. Kids should be encouraged to narrate the stories they love to hear in their own words. Start with the shortest one, and they will catch on the longer ones easily. Older kids, with a little help in the choice of words and narration style from their parents, become great storytellers for their younger siblings.