Investing for people working on Tier 2 general visa

I am in the UK working on Tier 2 general visa. Which comes with additional work restrictions.

Could I trade in UK stocks? Would that create some sort of hindrance in obtaining LTR later on? Dividends could count as self employed source of income? Am I legally allowed to trade in stocks?

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Dividends will not count as a self employed source of income. You’d have to be day trading as a source of income for that argument have any weight. Assuming you’re just buying and holding, Freetrade away. You are also eligible for an ISA if that’s the plan (assuming you are in the UK for more than 183 days a year or whatever the number is these days).