Clusters of magnetic impurities are believed to play an important role in retaining ferromagnetism in diluted magnetic semiconductors (DMS), the origin of which has been a long debated issue. Controlling the dopant homogeneity in magnetic semiconductors is therefore a critical issue for the fabrication of high performance DMS. The current paper presents a first principle study on the stability and magnetic properties of Co doped (ZnO)n (n = 12 and 15) clusters using density functional theory. The results show that cobalt ions in these clusters tend to increase their stabilities by maximizing their co-ordination numbers to oxygen. This will likely to be the case for (ZnO)n clusters with n other than 12 and 15 in order for Co to reside in a stable local crystal field. Expansive (shrinkage) stress is introduced when cobalt resides in exohedral substitutional (endohedral interstitial) sites; such strain can be offset by the cluster deformation. Bidoped cluster is found to be unstable due to the increase of system strain energy. All the doped clusters were found to preserve 3 microg of magnetic moments from Co in the overall clusters, but with part of the local moments on cobalt re-distributed onto neighboring oxygen atoms. Current findings may provide a better understanding on the structural chemistry of magnetic dopants in nanocrystallined DMS materials.