1 for the first.
1 for the first upgrade at high rank
1 for the second and last upgrade at G-rank
So you will need a total of 3. And yes, the worm or mega lure work. Just keep diving into the water if you do not see the fish. After a few minutes, you will see the fish you want, then make sure to pull your bait out if you are going to catch any fish other than the one you want...
Or you can just keep going to the rotting log and pick up worms and going back, its really up to you.