[seanhunter]

You open a margin account and post some collateral (usually cash or treasuries). You sign a margin agreement (which is essentially a credit aggreement) committing to pay up for any losses. The broker can use the posted collateral to cover losses and you will be asked to put up more margin if losses deepen beyond a certain point.

There are a few different ways to be short of a stock but the most common are to sell short in which case you have a few days to buy the stock or locate a borrow before the trade settles. Other ways to be short are to write call options which you can just do by selling that option to someone, or buy put options. In certain cases you can short a contract for difference or single stock future or short the return on the stock in an equity swap. For all of these you'll need your broker to facilitate.

Brokers don't work together which is how the aggregate position of all shorts can get larger than the total number of stocks in issue. This is obviously not a healthy situation but the brokers are relying on the collateral to enable them to make good any losses.

Finally some people may have a short as a partial hedge for an overall long position (eg "Crash put protection") so may be net long overall.

[seanhunter]

It's worth adding that in some of the examples I gave above you can be short a stock but settle as cash so you don't necessarily need to locate physical stock to pay up.

In those examples the price of the stock is just a reference point used to calculate the quantity of the cash payment between the two parties so although the short will lose money if the stock rises they are not "squeezed" in the sense they are not desperately searching for stock to buy at any price.