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 (Cantonese:, "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 most importantly of all, no matter how much it cries or begs, 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 captured and killed 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 a glass of water over Gizmo, five more mogwai spawn from his back, a more troublemaking sort led by the aggressive Stripe (distinguishable from the other mogwai by the patch of white fur on his head). 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 make cocoons, as does Hanson's mogwai. Shortly after, the cocoons hatch and they emerge as mischievous, reptilian monsters that torture Gizmo and try to murder 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. Billy tries to warn the police, but they don't believe him. Many people are injured or outright killed by the gremlins' rampage, including Mrs. Deagle, who is launched out of her house on a stair lift that has been sabotaged by the creatures. At the local bar, the gremlins have fun until the barmaid Kate Beringer, Billy's girlfriend, flashes them with a camera and escapes into the bank with Billy and Gizmo. While hiding, Kate reveals her father died in a chimney while dressed as Santa Claus. 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.
Billy chases Stripe into the store, where Stripe attempts to use a water fountain to spawn more gremlins. Gizmo arrives in a toy car and opens a skylight, exposing Stripe to sunlight and killing him. In the aftermath of the rampage, Mr. Wing arrives to collect Gizmo, scolding the Peltzers for their carelessness, thinking the Western world is not ready for the gift of the mogwai, but comments that Billy might some day be ready to care for Gizmo properly. Gizmo likewise believes so, having become attached to Billy. Mr. Wing then departs with Gizmo.
