Randall Peltzer, a struggling inventor, visits a Chinatown antique store in the hope of finding a Christmas present for his son Billy. In the store, Randall encounters a small, furry creature called a mogwai ( "devil"). The owner, Mr. Wing, refuses to sell the creature to Randall. However, his grandson secretly sells the mogwai to Randall, warning him to remember three important rules that must never be broken: do not expose the mogwai to light, especially sunlight, which will kill it; do not let it come in contact with water; and above all, never feed it after midnight.
Randall returns home to Kingston Falls where he gives the mogwai to Billy as a pet. Billy works in the local bank, where he fears his dog Barney will be put down by the elderly miser Mrs. Deagle. Randall names the mogwai "Gizmo" and Billy makes sure to treat him well. When Billy's friend Pete accidentally spills water over Gizmo, five more mogwai spawn from his back, a more troublemaking sort led by their aggressive ringleader, Stripe. Billy shows one of the mogwai to his former science teacher, Mr. Hanson, spawning another mogwai, on whom Hanson experiments. Back at home, Stripe's gang tricks Billy into feeding them after midnight by severing the power cord to his bedside clock. They form cocoons, as does Hanson's mogwai. Shortly after, the cocoons hatch and they emerge as mischievous, reptilian monsters referred to as 'gremlins', who then torture Gizmo and attack Billy's mother, while Hanson is killed by his gremlin.
All of the gremlins are killed except Stripe, who escapes the house to a local YMCA and jumps into a swimming pool, spawning a new army of gremlins who wreak chaos around Kingston Falls. Many people are injured or outright killed by the gremlins' rampage, including Mrs. Deagle. Kate Beringer, Billy's girlfriend, finds him and Gizmo and they escape into the bank. While hiding, Kate reveals to Billy and Gizmo the real reason why she hates Christmas. When she was 9-years-old, her father disappeared on Christmas Eve and did not return on Christmas Day. Several days later, he was found dead in their chimney while dressed as Santa Claus. He was planning a Christmas surprise for Kate and her mother but had slipped and broken his neck while climbing down the chimney. Billy and Kate discover the town has fallen silent and the gremlins are watching Snow White and the Seven Dwarfs in the local theater. They set off an explosion, killing all the gremlins except Stripe, who left the theater to get more candy at a Montgomery Ward store across the street. As morning approaches, Billy chases Stripe into the store, where Stripe attempts to use a water fountain to spawn more gremlins. Gizmo opens a skylight, exposing Stripe to sunlight and melting him.
In the aftermath of the rampage, Mr. Wing arrives to take Gizmo back. He scolds the Peltzers for their carelessness, and states that Western society is not ready for the responsibility of caring for mogwai, but comments that Billy might some day be ready to care for Gizmo properly. Gizmo likewise believes so, having become attached to Billy, and bids him goodbye just before Mr. Wing departs with him.
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