Between ages two to three, your toddler will understand and express a lot. Keep in mind that it may be difficult for others to understand what he or she says. I often tell parents that they shouldn't expect their toddlers to be able to speak exactly like an adult once they learn to talk.
Your toddler should be able to understand differences in meaning. For example, he or she should be able to know what stop and go, in and on, big and little, up and down mean. He or she should begin to follow two step directions such as "go to your room and get your shoes" or "get your diaper and put it in the garbage can." Your toddler's attention span will continue to increase, and he or she should be able to be able to enjoy listening to stories for longer periods of time.
At age two to three, your toddler will start to use a word for almost everything. He or she will use two to three word phrases such as "doggie go outside" or "I want juice" when talking about things and when making requests. Your toddler should be able to correctly say and use the k, g, f, t, d, and n consonant sounds. Children at this age should also names objects to ask for them or direct attention to them.
Keep in mind that the milestones discussed in this series of posts are just a quick overview of what your toddler should be able to understand and say. Every child develops at a different stage, so try not to compare your toddler to other siblings or children. However, if you are concerned about your toddler's speech and language development you can always contact a local speech-language pathologist or your state's early intervention program for an evaluation to determine if your child needs speech therapy. Speech-language pathologists are here to help you and your child!