By default makeindex assumes word ordering. The -l option turns it into letter ordering. The only difference is whether a blank is treated as an effective letter or not. In word ordering, a blank precedes any letter in the alphabet, whereas in letter ordering, it doesn't count at all. This is best illustrated by the following example:

Numbers are sorted in numeric order. For instance,

Letters are first sorted with uppercase and lowercase considered identical; then, within identical words the uppercase letter precedes its lowercase counterpart.

Patterns lead by a special symbol precede numbers, which precede patterns lead by a letter. The symbol here refers to anything not in the union of digits and English alphabet. This includes those which follow 'z' in the ASCII chart. As a special case, anything started with a digit but mixed with non-digits is considered a symbol-leading pattern instead of a number.