GV,
Let's take, for example, a short sale of 100 shares of Intel at 70. The cash I would receive would be $7,000. If there were no other securities at all in the account, I would need an initial margin of 50%, or $3,500. I would receive interest on $10,500 cash. If Intel were to rise to 80, I would receive interest on $10,500 cash. If Intel were to decline to 60, I would receive interest on $10,500 cash.
Maybe different brokerage firms do it differently but that is not how my short account works.
My short balance is marked to the market every day. The interest I receive on that balance is slightly less (80 to 90% of the full market rate) than the interest I receive on the cash balances held in that account. If the price of my shorted stocks drops I receive the full market rate. If the price of those shorted stocks rises, I receive less at the full-rate and more at the lesser rate. If I were on margin, I would indeed be paying margin rates if the shorts were at a loss.
Example:
Short 1,000 shares of Intel at $70. Have $100,000 cash balance in account.
Intel closes at $70: I receive interest at 5% on $100,000 and 4.5% on $70,000 from INTC short.
Intel closes at $80: I receive interest at 5% on $90,000 and 4.5% on $80,000 from INTC marked to market.
Intel closes at $60: I receive interest at 5% on $110,000 and 4.5% on $60,000 from INTC marked to market.
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