Without seeing your rifle, and reading your questions, I am guessing you have a collapsable stock rifle. There are several things you can do to improve your shot group. Obviously the big three are practice, practice, practice. Other things that will help you:
You are trying to align 3 things at once, the rear sight, the front sight and the target. You should focus on the front sight, the rear sight should be a blurry circle around the front sight. The target should be blurry behind the front sight. It should be easy for your eye to align the top of the front post in center of the rear sight.
As for what length to put your stock at, I have seen people use them completely collapsed, completely extended and everywhere in between. I will give you this simple advise, the Army used to teach you to put your nose bumping the charging handle if you could or they put a piece of tape on the stock so that you had it the same distance every time, so just extend the stock to where it is comfortable and your nose just touches the charging handle. The recoil won’t bother you. Understand it may change a notch or so if you switch from prone to standing, sitting or kneeling.
The other thing you haven’t mentioned is the position you are firing from. A prone supported firing position or bench supported position will be much more stable than a standing kneeling or sitting unsupported position.
Without knowing what kind of range you shoot at, I would suggest you focus on shooting from the prone or seated at the bench. firing 5 shot groups at a zero target. evaluate the target, don’t worry about adjusting the sights, fire another 5 at the same target. Do this until you get groups that are consistantly hitting in the same place. Once you have done that you have achieved a consistant sight alignment. Now adjust your sights so that your point of impact is where you want it. Fire another group or two to confirm your adjustments.
You will here a lot about the 8 steady hold factors or the 4 fundementals from prior service guys. Personally I think they are violet versus purple, they both cover the same things, one is just more detailed than the other. But I will list the four fundemental any way: Steady Position, Sight Alignment, Breathing and Trigger Squeeze. Master those and your shot group will tighten right up
Good luck and have fun practicing.