How Did Blue Chip Stocks Get Their Name?

A Short History Guide That Explains Where the Term Blue Chip Stock Originated

Origin of the Term Blue Chip Stock
The term blue chip stock comes from the fact that blue chips were the highest value chips in poker games. Likewise, a blue chip stock is one that represents the highest quality firm in which an investor can acquire an ownership stake. Getty Images News

If you've been investing for very long, you've no doubt heard about blue chip stocks; a special classification of stocks that represent the best of the best.  In the off-chance you haven't, yet, encountered it in any meaningful sense, the short version is this: a blue chip stock is a stock that represents ownership in an extraordinarily high quality firm; a business with certain characteristics such as a rock-solid balance sheet, a fantastic dividend growth record and/or record for price stability relative to other stocks even in the midst of a capital market maelstrom, and, almost always, an enterprise that possesses some sort of durable competitive advantage that makes it difficult, if not impossible, to displace it in the market place as a result of entrenched privileges arising from things such as economies of scale.

  All blue chip stocks have investment grade bond ratings, and, of course, a handful even boast the coveted AAA rating. This, in turn, indicates the common stock tends to be safer, too, since there are fewer liabilities between the stockholder and the assets in the event something goes wrong.  Blue chip stocks still fluctuate, as all stocks do, but overall have a long history of fluctuating less than their weaker counterparts.  Some, but not all, stock market index methodologies result in stacking the component list with blue chip stocks; e.g., the Dow Jones Industrial Average.

Still, the term "blue chip" is a bit odd.  How did blue chip stocks get their name?  Great question!  It turns out, the blue chip moniker is borrowed from the game of poker.  When playing cards, the highest denomination of poker chip was - you guessed it - the blue chip.  Generations ago, it became common for folks to say they were "buying a blue chip" or something along those lines, recognizing that certain stock positions had characteristics that made them long-term investments; that made them safer than the typical enterprise when viewed from the perspective of the actual operating business.

 That is the reason blue chips are the quintessential buy and hold investment; made to be acquired and put away in a bank vault for years, decades even, so you can live off the dividend income.  Some folks even get so good at acquiring blue chip stocks, they turn minimum wage jobs into multi-million dollar fortunes, like the late janitor Ronald Read, who used his spare change to buy them for 50+ years to the point that when he died, they found a five-inch thick stack of stock certificates in his safe deposit box and discovered he had been sitting on $8,000,000+ in shares.

To learn more about the topic of blue chip stocks and the buy and hold strategy, you might want to read an article called The Benefits of Owning Blue Chip Stocks.  I also do case studies of blue chip stocks on my personal blog, examining firms like Hershey or Coca-Cola, the latter of which might arguably the greatest blue chip stock of all time as a single share bought for $40 in the IPO back in 1919, with dividends reinvested, is now approaching $15,000,000 in market value.  It sounds crazy but it's true.  Many people don't realize Coke actually owns much more than soft drinks.  By now, they generate money from 3.5% of all beverages consumed on the planet, including tap water.  Year after year, decade after decade, the dividend gets hiked and investors get richer despite sometimes suffering the vicissitudes that are endemic to equity ownership.  Of course, there is nothing guaranteeing that will continue in the future.  The point, rather, is to demonstrate that a wonderful business held for decades or generations in a tax-efficient way, ignoring the day-to-day and even year-to-year fluctuations in the stock market, can result in truly breathtaking outcomes.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.