I have not shorted in years, but when I did, I did not pay interest. Actually, since I was selling shares I did not own, the balance of my trading account would go up, but the margin leverage ability would go down. If prices of shorted securities went up; then, the margin and ability to trade would go down. If one is not careful, one could easily get into margin problems (margin calls). Can't remember, but I may have been getting interest from the shorted shares, since the account balance went up. Strange, I know. Shorted shares are not guaranteed, and could get pulled without notice. Never happened to me, but is possible.
Shorting can only be done with margin accounts. For many years I have predominately traded retirement and 401K accounts (non margin). I like the tax consequences.
I think things have changed. I have read that there is some charge for retail shorts. But, this may be broker specific.
Most shorts are actually institutional, including Market Makers. MM's often short into rallies, in order to be able to obtain shares to execute trades when demand is greater than supply. It's more mechanical on their part. But, if things get too hot; then, MM's will increase the spread, or slow down executions. I think MM's have 3 days (in practice more) to square their short positions without the need for providing countervailing long shares. I often keep an eye on spreads when things get hot. Tight spreads indicate that the price is being allowed to move, wide spreads tend to slow trading, and allows for momentum change. Many times spreads will cycle, allowing MM's the opportunity to retrench. Many times prices will reverse briefly, to allow for additional shares (coming from late comers or those wanting to take profits or those who's confidence is waning). Often it's just a game of emotions. Greed vs. fear. The facilitators, MM's, are participating too, so Bid, Ask, and spreads are influenced by them. They will often take out buyers or sellers, then reverse. This is a common practice at open, when positions are taken out in the opposite direction to true momentum. Hence, lots of reversals early in the morning. They see all supply and demand (except dark pools), and have a better view of the market than most.
Hope people with better or more recent knowledge respond to your post. I am curious too.
I prefer to be able to have the ability to short or hedge my investments. This is not usually possible for small cap stocks, and one reason I prefer paired (long/short) ETF's, and highly liquid, larger cap stocks. I think those who have the ability to short small caps have a big advantage over normal retailers. Let's face it, selloffs are often much more predicable with small caps.
