The story begins in the Shire, where the hobbit Frodo Baggins inherits the Ring from Bilbo Baggins, his cousin[note 2] and guardian. Neither hobbit is aware of the Ring's nature, but Gandalf the Grey, a wizard and an old friend of Bilbo, suspects it to be Sauron's Ring. Many years later, after Gandalf confirms his suspicions, he tells Frodo the history of the Ring and counsels him to take it away from the Shire. Frodo sets out, accompanied by his gardener and friend, Samwise ("Sam") Gamgee, and two cousins, Meriadoc Brandybuck, called Merry, and Peregrin Took, called Pippin. They are nearly caught by the Black Riders while still in the Shire, but they shake off their pursuers by cutting through the Old Forest. There, they are aided by Tom Bombadil, a strange and merry fellow who lives with his wife Goldberry in the forest. Surprisingly, the Ring has no power over him.

The Hobbits reach the town of Bree, where they expect to meet Gandalf. Instead, they encounter a Ranger named Strider, whom Gandalf had mentioned in a letter. Strider persuades the hobbits to take him on as their guide and protector. Together, they leave Bree after another close escape from the Black Riders. On the hill of Weathertop, they are again attacked by the Black Riders, who wound Frodo with a cursed blade. Strider fights them off with fire and leads the hobbits towards the Elven refuge of Rivendell. Frodo falls deathly sick from the wound. The Black Riders nearly overtake Frodo at the Ford of Bruinen, but flood waters summoned by Elrond, master of Rivendell, rise up and overwhelm them.

Frodo recovers in Rivendell under Elrond's care. The Council of Elrond discusses the history of Sauron and the Ring. Strider is revealed to be Aragorn, Isildur's heir. Gandalf reports that Sauron has corrupted Saruman, chief of the wizards. The Council decides that the Ring must be destroyed, but that can only be done by sending it to the Fire of Mount Doom in Mordor, where it was forged. Frodo takes this task upon himself. Elrond, with the advice of Gandalf, chooses companions for him. The Company of the Ring are nine in number: Frodo, Sam, Merry, Pippin, Aragorn, Gandalf, Gimli the Dwarf, Legolas the Elf, and the Man Boromir, son of the Ruling Steward Denethor of the land of Gondor.

After a failed attempt to cross the Misty Mountains through the Redhorn Pass, the Company are forced to take a perilous path through the Mines of Moria. They are attacked by the Watcher in the Water before the doors of Moria. Inside Moria, they learn of the fate of Balin and his colony of Dwarves. After surviving an attack, they are pursued by Orcs and by an ancient demon called a Balrog. Gandalf faces the Balrog, and both of them fall into the abyss. The others escape and find refuge in the Elven forest of Lothlórien, where they are counselled by Galadriel and Celeborn.

With boats and gifts from Galadriel, the Company travel down the River Anduin to the hill of Amon Hen. There, Boromir tries to take the Ring from Frodo, but Frodo puts it on and disappears. After the Company scatters to search for Frodo, they are attacked by Orcs. Frodo chooses to go alone to Mordor, but Sam guesses what he intends and goes with him.