The adult Billy Colman narrates his childhood memories. Living with his Papa and Mama and three sisters in the Ozark Mountains in Oklahoma, all 10-year-old Billy wants is two hounds with whom he can hunt "coons" (raccoons). His family cannot afford them, however, so Billy works odd jobs for two years and saves up the money to buy them. Only then does he tell his plan to his Grandpa, who helps arrange the purchase.

After an initial adventure in which they scare off a mountain lion, Billy and his two hounds - a small, intelligent female dog he names Little Ann and a stronger, determined male dog he calls Old Dan - are inseparable. They learn all the angles of coon hunting and make a great team; no wily coon can outsmart Little Ann, and Old Dan is strong and sure. More than that, the dogs seem bonded to each other, and to Billy, in mysterious ways. Both dogs' lives are endangered at different points, but with bravery and intelligence they all help each other out of jams.

One day, the cruel, trouble-making Pritchard boys bet Billy that his dogs, whose reputations grow with each new coonskin, cannot "tree" (chase up a tree, at which point the hunter usually chops down the tree) the elusive "ghost coon" in their neck of the woods. On the hunt, the elder Rubin accidentally falls on Billy's ax as he tries to kill Billy's dogs (who are fighting the Pritchards' dog). The incident haunts Billy.

To cheer Billy up, Grandpa enters him in a championship coon hunt. Billy, Grandpa, and Papa go to the contest. Immediately, Little Ann wins the beauty contest. Billy qualifies for the championship round in which his dogs bag three coons, but a blizzard sets in as they chase away a fourth one necessary for the win. The men eventually find the half-frozen dogs circling a treed coon. When they kill the fourth coon, they win the championship and the $300 jackpot.

The family is ecstatic over Billy's success, and Mama is especially grateful for the money. But some weeks after the championship, Billy and the dogs encounter a mountain lion. The dogs save Billy's life, and they manage to kill it, but not before it inflicts serious damage on Old Dan. He dies, and without him, Little Ann loses the will to live and dies a few days later. Billy buries them next to each other and cannot understand why God took them from him.

With the money the dogs have earned over time from the coonskins and the jackpot, the family can finally move to town in the spring and the children can receive an education. On the day they move, Billy revisits his dogs' graves. He finds a red fern has sprouted up between the two mounds. He knows the Indian legend about a little boy and girl who had been lost in a blizzard and froze to death. When their bodies were found in the spring, a red fern had sprouted between them. As the legend goes, only an angel can plant the seeds of a red fern, which never dies and makes the spot sacred.

The adult Billy reflects that he would like to revisit the Ozarks and all his childhood haunts. He is sure the red fern is still there, larger now, for he believes its legend.