Lucy Carlyle has escaped to London after a paranormal investigation she was on went horribly wrong, killing several children with whom she worked. Desperate for money, she takes a position with Lockwood & Co., a paranormal investigating agency run by a boy named Anthony Lockwood. His only other employee is George, whose expertise is research, rather than fieldwork.
The Problem — ghosts and spirits terrorizing London and the surrounding countryside — began several decades ago. Many children can see or hear the paranormal beings and so are used, usually with adult supervision, to locate the offending entities and the “source” from which they emanate.
Lucy and Lockwood investigate a house in which Mr. Hope died three months ago when he fell down the stairs. His wife is convinced a ghost did it. As night approaches, Lucy begins to hear knocking in the house.
Lockwood, excited to have an actual ghost to hunt, left the agency without making sure their packs contained all their equipment. Lucy initially wants to return to the office, as they do not have the iron chains necessary if they find a powerful evil spirit. Ghosts cannot cross iron, and so chains give investigators the best protection. Lockwood insists they can manage with the tools they have.
They create a circle of iron filings to keep the ghost at bay. Unfortunately, when they discover a decomposed body in a chimney, they are stunned and accidently break the circle. The ghost crosses the barrier and reaches for Lockwood. Being touched by a spirit can cause great harm to a human, even killing him. Desperate to save him, Lucy throws a canister of Greek fire at it.
Filled with magnesium, iron and salt, (substances harmful to ghosts,) it causes the entity to disappear. The resulting flames catch the papers and books in the study on fire. Lucy and Lockwood must jump from the second story window in order to escape. Lockwood leaves Lucy with the medics to tend to her minor wounds.
Once mended, Lucy returns to the London townhome that serves as both office and house for the agents of Lockwood & Co. George shows her what he has discovered. Mrs. Hope’s house was once the home of Annabel Ward, a young woman who disappeared almost 50 years before. It was her body hidden in the chimney. Lockwood returns after being interrogated by the police about the incident. He was also treated for a ghost touch as Annabel’s spirit had grabbed his hand, leaving it numb.
In the morning, the three agents are discussing the case when an agent of the Department of Psychic Research and Control, or DEPRAC, arrives to question them. Mrs. Hope is suing Lockwood & Co. for damages to her house. They have five weeks to pay the family £60,000 pounds or the agency will be closed and the house seized for the fine.
That night, a ghost accosts Lucy in her bedroom because she took a necklace off Annabel’s body. The woman’s spirit was bound to the locket, which is now at the agency. George and Lockwood manage to dispel the apparition, but are furious to learn that Lucy disobeyed protocol and took an artifact from a haunting without telling them, or securing it with iron to keep the spirit locked inside.
To make matters even worse, the newspapers print the story of the fire; what few jobs Lockwood had are canceled, leaving them without any income. Lockwood decides that their best course of action will be to solve the case of Annabel’s murder.
The children discover a mysterious inscription on the locket — Latin words translated as “My torment, my bliss.” Lockwood goes to both the police and the newspapers with the information and is thrilled when the paper runs a glowing article about the agency’s sleuthing work.
Returning home after being interviewed by the police, the young agents discover someone has ransacked the agency and released several spirits from what were locked objects. The agents must subdue the spirits. The intruder appears to have been after Annabel’s locket, which Lucy had again taken with her without telling the others.
Lockets are made to hold objects. This one holds another inscription — the letters A and W, separated by two crosses. Below that are the letter H and a series of numbers. The children believe the A and W are for Annie Ward and that the H stands for Hugo, her boyfriend and prime suspect in her murder.
The following morning, Mr. John William Fairfax, the heir to the Fairfax Iron Company, hires them to investigate an extremely dangerous mansion he owns in the country. (Iron manufacturers became wealthy when iron became one of the few substances that could trap or harm ghosts.)
Fairfax is willing to pay the agency’s fine up front, just for staying the night and investigating the hauntings in The Red Room and the Screaming Staircase. If they are able to locate the Source of the disturbances, he will pay the agency double their normal fee. Fairfax’s other stipulations are that they must come out to the property within two days, which means George will not have much time to research the house’s past; and they will not bring any explosives with them. They must try to secure the entities with iron only. Much to Lucy’s and George’s displeasure, Lockwood immediately agrees to investigate.
While the boys prepare for the trip, Lucy decides to experiment. She creates a circle of iron chains. She then places the locket inside it and releases the spirit from the necklace. Lucy shows it a picture from a society page in which Annabel is seen in a crowd with several of her friends, including Hugo. The ghost screams violently, knocking Lucy down.
George and Lockwood arrive home in time to see Lucy release a salt bomb to dissipate the ghost, but they are furious she attempted such an experiment on her own. Lucy tells them how Annabel became violent when shown the picture of Hugo. Lockwood studies the picture further and then praises Lucy for her work. He says she has uncovered a key piece of evidence in solving the case, but they will wait to go to the police until after they investigate the Fairfax Mansion.
The children hire a taxi to go to the mansion, and after they arrive, Lockwood pays the driver a substantial amount of money to deliver a package. They are given a tour, complete with sordid details of the building’s past, from the caretaker, Mr. Starkins. Their bags are searched to ensure they do not contain any incendiary devices.
Mr. Fairfax meets them at the house to complete the tour, as the caretaker will not go near the haunted Red Room. As they pass a wall of photographs, Lockwood notices one of Fairfax in a production of Hamlet. Fairfax leads the children upstairs to the door of the Red Room and gives Lockwood the key. He tells the children that they do not need to go into the room, but that is where the source of the hauntings probably resides. Fairfax and Starkins leave the children in the house before sunset, as that is when the spirits become active.
When night approaches, the children enter the Red Room, propping the door open so they can make a quick escape should things get too dangerous. Unfortunately someone, or something, locks them inside. Spirits torment them. Plasm, which will harm them like a Ghost Touch, drips from the ceiling and begins to spread across the floor. They flee from the safety of their iron circle, hoping to find a secret passage that George discovered in an old floor plan.
Lucy barely finds it in time, and the three find themselves shut up in a narrow passageway behind the wall of the Red Room. A staircase heads downward, and the children soon hear the shrieks and see the shadow spirits of monks who were forced into the cellar of the house and drowned in a well. The children use everything they have against the evil spirits, even the incendiary bombs Lockwood managed to sneak in, but to no avail. The rage of the monks is too strong.
Finally, as Lucy is drawn toward the well to kill herself, Lockwood realizes the source must be down inside it. The children throw the last of their weapons down the well, including all their iron chains and bombs. The well explodes and the spirits dissipate.
The children leave the secret passage, only to be confronted by Fairfax and Grebe, his chauffer, who holds them at gunpoint. Lockwood is not surprised. He had deduced that Fairfax was Annabel’s killer. The two had performed together in Hamlet; the locket’s inscription was a reference to a scene from the play. They were secret lovers because Fairfax’s family did not approve of Annabel’s lower-class status.
Fairfax, jealous of her relationship with Hugo, killed her in a fit of rage and hid her body. Lucy releases Annabel’s ghost from the locket. It immediately attacks Fairfax, killing him with its Ghost Touch. The police arrive, having been alerted to Lockwood’s theory by the package he had asked the taxi driver to deliver. They take the chauffer into custody, and their paranormal agents secure the rest of the house.
Lucy, Lockwood and George return to London as heroes. Fairfax had indeed wired the money into their account so they could pay their fine, and the good publicity gives them more job prospects. Although they must keep Fairfax’s role in Annabel’s murder a secret so that it does not tarnish his company’s reputation, they are thrilled with all they’ve accomplished and celebrate with a party.