There is a spectrum of literal biblical reading, but basically it boils down to the degree to which one believes in the historicity (in the modern sense) of the Bible.
Archeological evidence only goes back as far as a steele mentioning the "House of David," so for modern academics, the historicity of say, Moses, Abraham, and Adam and Eve are all at least suspect. Opinion varies as to whether, say, a baby boy who should have been murdered was actually set adrift in a boat made of bull rushes. A literalist would say, yes, this literally happened, and a liberal would say that it is a mere birth narrative to set the tone for who Moses would be. Likewise, a liberal would say that clearly a few Hebrew slaves probably escaped across a "Reed Sea" (a swamp) whereas a literalist would, with no evidence to the contrary, state that in fact 525,000 Israelite men plus their wives and children pass through the Red Sea, with the waves held back on either side and Charleton Heston in front holding a stick. The same analysis holds for an actual Adam and Eve, whether or not a woman named Tamar really did seduce her father-in-law, and a whole host of other stories.
As one who is probably more literal than most, I would suggest there are a few categories in which to consider the question:
Parables and other stories identified as such:
When Jesus told the parable of the Good Samaritan, for example, he pretty clearly identifies it as such. Now, I've driven through the West Bank up from Jericho to Jerusalem, and along the way, you can pass the "Inn of the Good Samaritan." Some people will say that is in fact a real event in history. This is an extreme form of literalism which negates the possibility of Jesus using metaphor, but it is a stance mostly restricted to ultra-conservatives.
Historical events that have miraculous involvement:
Very few scholars would now argue that there was no King David. Very few also doubt that there was a big Philistine named Goliath whom he killed. The question is typically along the lines of, "Was he really just a boy with a sling?" As a literalist who believes that God does intervene in history, I tend to view this as an actual event that occurs more or less as the Bible describes it. Could it have been four stones in his pouch instead of five? For me, that would be an irrelevant detail - for an inerrantist it would be a requirement. For a liberal, the entire story was probably an embellishment after a real knock down, drag out battle, and the details grew in the retelling.
Prehistorical / Other more figurative:
Genesis 1 -11, parts of Daniel, Zechariah, and Revelation are special cases, in that scholars often disagree as to whether or not these were meant to be understood as history or legend. Along these lines, Job appears in the section of the Old Testament called the "Ketuvi'im" or "Writings" alongside Psalms, Proverbs, and Ecclesiastes. It may be that the original author intended this as a story all along, or it could be real, or it could be "historical fiction." As there is no title page on the book of Job, it could be analagous to finding one of Shakespeare's plays - and that could mean anything from Henry V to Romeo and Juliet. Imagine if you had no historical reference to figure it out. Likewise, Daniel is not billed as historical (it's in the Nevi'im), and yet it has more historical detail in certain points than many textbooks.
The question with all of this then is the degree to which a reader ascribes historicity to a narrative. Keep in mind that prior to Thuycidides, even the very notion of a story that attempts to merely describe historical events (while still making a point) wasn't really even an idea, and you'll see why there is controversy. People can argue hermeneutics (the scince of how a text should be interpreted) and archeology all day long - the fact is that there is a choice that must be made a priori, and understanding the implications of that for one's theology is the real heart of the matter.