Here is an old post I made about shorting stocks.

Let's pretend that you want to short sell 100 shares of stock XYZ at 1.00 and I'm a hedge fund. I would loan you the 100 shares or "borrow 1,000." Like any loan you have to pay back what you borrowed. Let's say stock XYZ tanks to .50 a share. You would BUY to Cover. So you would buy back 100 XYZ at .50 a share and return to me the 100 shares. Remember, you borrows shares not money. So after you sold the shares I loaned you that had a value of $1,000 and it only cost you $500 to buy it back then you made $500, sort of. Since no one will loan you money for free there's an interest fee for the loan. Of that 500.00 you made you can probably expect to pay around 30 - 50 dollars for the loan of 100 shares that would give you a profit of 450.00 - 480.00. Now, let's say the stock sky rockets to 1.50 a share. I'd perform a margin call on you demanding my shares back and it'd cost you 1,500 plus interest. If the company goes bankrupt you don't have to return the shares and all the money is yours. Shorting a stock is extremely risky considering the amount of money you can lose is theoretically indefinite. The most you can make is the value of the sell while the most you can lose is endless. While going long you can only lose what you put in and the amount you can make is theoretically indefinite. I hope I explained that in way you can understand.