How Do Children Learn Words?

My children are three years old, almost four. And they are learning vocabulary so, so, so quickly. It's amazing to watch it. They learn words just from listening to my wife and I talk in English or speaking to them. So conversation is a great way for kids to learn new words. But the other way they learn new words is through stories,. We were reading a book. There's one called caps for sale. He only has one cap on his head.