Well, not quite!
To "short" a stock, what you do is "borrow" (let's use the example of 100 shares of Yahoo!) from your Brokerage for a FEE. So they "lend you" $3,600-worth of shares for a commission of (for example) $49...
So you have spent $49 and have 100 shares, which you sell immediately for $36 a share (plus another $49 fee for the sale)...You now have $3,502 in cash...if Yahoo! stock has dropped to $30 a share a week later, you can buy 100 shares for only $3,000 (plus another $49 commission) and give THOSE shares back to your Brokerage to settle your loan...
So in the end you have no shares, you spent $147 but MADE $403, so have a net profit of $256!
But yes, you MUST "buy shares to the cover the short afterwards no matter the price" because if you DON'T you will still OWE that number of shares back to your Brokerage, who will charge you additional fees & interest at very high rates until you DO!
If the price goes down enough, you do well....but if it does NOT go down enough (or if it goes UP), you can end up owing far, far more than the initial value of the shares...
BTW, no "respectable" brokerage would let you short "Penny stocks" (shares trading at less that $5/share) anyway...
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Many new investors are lured to the appeal of a penny stock due to the low price and potential for rapid growth which may be as high as several hundred percent in a few days.
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You basic logic is correct but you are over looking a few important facts.
I-You can not short a penny stock, which is any stock selling for less than $5 a share.
2-You will need to get permission from your brokeage firm to sell short
3-When you sell short you will have to deposit money into your account to cover the short, approx 30% of the market value of the short
4-There is a commission when you buy and sell a stock, usually the commission is $5-$10 to sell short and another $5-$10 to buy the stock back
5-If you sell short and the market price goes up after you sell short you will be asked to deposit additional monies into your account
Short selling is not for a newbie
Forget about what some are telling you about borrowing the stock - SHORT SELLERS DO NOT borrow the stock, it is the brokerage firms responsibility to borrow stock and pay the fee. The borfrowed stock is for the brokerage firms benefit not the short seller
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It is "admirable" that you are wanting "to learn".
However, only people who ask about "selling short" are likely to "try it". People who don't ask, never "try it".
Selling short is a "advanced" stock market program. It is not for the "average bear". You, my friend, are an average bear. Don't waste any more time, and definitely, NONE OF YOUR MONEY on this. As Drago said to Rocky, "You will lose".
You pretty much have the basics. When you sell short, you are basically borrowing the shares (with a fee and interest) from your broker. You can generally hold them as long as you want, unless they go way up in price, then the broker may call them in.
That's it!
Im new and just trying to understand the business. Lets say a stock opens at $3 and closes at $2. you would make a profit of $1 per stock. and if it goes up I have a trigger to sell like $.75 and lose that .75 per stock only? And if I do end up with a short sell of $2 I would have to buy to cover the short afterwards no matter the price?
