Yep the stuff that goes in between the cpu and heatsink is to aid the transfer of heat to the waterblock (it fills in the air gap) I presume you mean artic silver and its pretty good stuff.
You will need to put a radiator which has a fan on it in the loop unless you are going to use a lot of water and have that positioned outside in a cold climate or something..which I guess is not an option for you...
The radiator and fan isn't complicated it just sits in between the pump and waterblock and cools that water as it passes through it...exactly the same way as a radiator cools a car.
