We were able to stabilize cobalt nanoparticles dispersible in water by optimizing the synthetic procedure using small polar thiol containing compounds as the capping agents. The nanoparticles were found to be spherical. The optical properties of the cobalt nanoparticles were investigated by monitoring the changes in the surface plasmon resonance (SPR) spectrum in various polar solvents. The extent of solvent dependence of the SPR spectrum was found to be dependent on the nature of the capping agent, the size of the cobalt nanoparticles, as well as the nature of the solvent. The Drude model was applicable for the particles capped with mercaptopropionic acid, while the effect of variations in the free electron density in the particles at different solvents became predominant in the nanoparticles capped with mercaptoethanol. The absorption spectra of the Co nanoparticles were simulated with the help of the classical Mie theory, and the results supported the effect of free electron density due to different capping agents on the spectra of the particles.