Below the head tube of the frame you should see a wedge on the fork that is called the crown race. The headset has captured bearings and should be all inside the head tube. See picture below. 


Above the head tube of the frame is first the compression wedge and then the tall conical spacer followed by three black spacers (all are needed for proper headset adjustment). 



Push the entire assembly down while wiggling the fork steer tube, which will allow proper seating of the crown race and compression wedge onto the steer tube. It will look like below. Note there are no large gaps between any of the parts.


Slide the stem over the top of the steer tube. Make sure the clamping bolts are loose enough not to cause binding. Push the stem all the way down and then install the compression bolt. Using a 5mm allen key tighten this bolt until it is snug. Proper tension of this bolt is important. You want to tighten it just enough so that the head set spacers will not spin when you attempt to turn them with two fingers. Too tight will hinder steering and wear bearings quickly, too loose and you feel a knocking/rocking motion under braking power or when riding.

HINT: It is often helpful to rock(wiggle/jostle) the stem/fork while tightening the compression bolt so that things fall into proper alignment. It is also best to do this adjustment with the bicycle resting both wheels on the ground. Rocking the bike is easiest by holding the front brake lever and pushing/pulling the handlebars.



Tighten down the clamping bolts once the stem is aligned to the tire.