Where'd the Term 'Blue Chip' Come From?

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You hear it all the time, most often associated in the U.S. markets with the Dow Jones Industrial Average companies. Commentators refer to them as "blue chip" companies. Of course, it's not just the Dow Jones companies such as Motley Fool Stock Advisor selection SBC Communications (NYSE: SBC) that receive this appellation, but some companies are blue chips, and some are not.

So where did the term "blue chip" come from? And how did big companies such as IBM (NYSE: IBM), Home Depot (NYSE: HD), Merck (NYSE: MRK), and General Electric (NYSE: GE) come to be known as blue chips?

Here's what my research turns up. As you might have guessed, "blue chip" comes straight from the color of high value chips one found on poker tables at the turn of the century. In 1904, the term blue chip first came into use to connote something that was valuable. More than two decades later commentators first began attaching this term to the largest, most reliable companies that one could invest in. I note with a certain sense of irony that, according to etymonline.com, the first recorded usage of "blue chip" in this fashion was in 1929.

The cynic in me notes that even back then there existed an unmistakable allusion between the stock market and gambling. What's funny, though, is that the only "chip" designation was for companies deemed to be the safest, well-known companies that had histories of making dividend payments. "Red chips," the second highest typical denomination for poker chips, aren't the mid-cap enterprises like Church & Dwight. In fact, the term "red chips" has come into use in the last decade to connote the stocks of the largest publicly traded Chinese companies. Nor are microcaps and speculative flyers known as "white chips." I can think of a few other choice "chip" designations for some companies, come to think of it.

I also note that the two publicly traded companies that have the highest correlation between their own success and poker's spiking popularity, Lakes Entertainment (Nasdaq: LACO) and WPT Enterprises (Nasdaq: WPTE), are nowhere close to being blue chips.

I wonder, though, given the timing of the original use of "blue chips" in 1929, during one of the biggest speculative booms in the history of the stock market, whether we aren't using it wrong today. After all, in poker, a blue chip doesn't really connote stability, just a large price. And it's still very easy in poker to lose a great deal of money on blue chips very quickly.

Bill Mann is a shareholder in a restaurant chain that signaled its intention to have a limited private offering by placing blue tortilla chips on its tables. Righteous. He holds none of the companies mentioned in this story.

Mathew Emmert seeks out big dividend paying companies each month for the Motley Fool's newsletter service tailor made for people seeking income from their investments. Take a free trial to Income Investor today and see what gems he's found!